Final Independent Auditors' Report - ED's 2016 Financial Statements

Below is a raw (and likely hideous) rendition of the
original report.
(PDF)

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U.S. Department of Education
John B. King, Jr.
Secretary
Office of the Chief Financial Officer
Tim Soltis
Delegated the Duties of Chief Financial Officer
November 14, 2016
This report is in the public domain. Authorization to reproduce it in whole or in part is granted. While
permission to reprint this publication is not necessary, the citation should be: U.S. Department of
Education, Fiscal Year 2016 Agency Financial Report, Washington, D.C., 2016.
This report is available at http://www.ed.gov/about/reports/annual/index.html. On request, the report
also is available in alternative formats, such as Braille, large print, or computer diskette. For more
information, please contact our Alternate Format Center at 202-260-0852 or by contacting the 504
coordinator via e-mail at om_eeos@ed.gov.
To become connected to the Department through social media, please visit the Department’s
website at www.ed.gov. Our Twitter page is at @usedgov, and our blog is at Homeroom.
Notice to Limited English Proficient Persons
Notice of Language Assistance: If you have difficulty understanding English, you may request
language assistance services, free of charge, for this Department information by calling 1-800-USA-
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[SPANISH]
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FY 2016 Agency Financial Report—U.S. Department of Education
[KOREAN]
영어 미숙자를 위한 공고: 영어를 이해하는 데 어려움이 있으신 경우, 교육부 정보 센터에 일반인 대상
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또는 청각 장애인용 전화번호 1-800-877-8339 또는 이메일주소 Ed.Language.Assistance@ed.gov
으로 연락하시기 바랍니다.
[TAGALOG]
Paunawa sa mga Taong Limitado ang Kaalaman sa English: Kung nahihirapan kayong
makaintindi ng English, maaari kayong humingi ng tulong ukol dito sa inpormasyon ng Kagawaran
mula sa nagbibigay ng serbisyo na pagtulong kaugnay ng wika. Ang serbisyo na pagtulong kaugnay
ng wika ay libre. Kung kailangan ninyo ng dagdag na impormasyon tungkol sa mga serbisyo
kaugnay ng pagpapaliwanag o pagsasalin, mangyari lamang tumawag sa 1-800-USA-LEARN (1-
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[RUSSIAN]
Уведомление для лиц с ограниченным знанием английского языка: Если вы испытываете
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For Fiscal Year 2016, in addition to the Agency Financial Report (AFR), the Department will post to
its website the Annual Performance Report (APR). The APR and the Congressional Budget
Justification will be posted on the Department’s website at
http://www.ed.gov/about/reports/annual/index.html with the FY 2018 budget.
Please submit your comments and questions regarding this report, and any suggestions to improve
its usefulness to AFRComments@ed.gov or write to:
Office of the Chief Financial Officer
U.S. Department of Education
Washington, D.C. 20202-0600
FY 2016 Agency Financial Report—U.S. Department of Education
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FY 2016 Agency Financial Report—U.S. Department of Education
About This Report
The purpose of the United States Department of Education’s (the Department) Fiscal Year (FY)
2016 Agency Financial Report (AFR) is to inform Congress, the President, and the American
people on how the Department has used the federal resources entrusted to it to promote
achievement and preparedness of students entering a global environment by fostering
excellence and ensuring equal access. The Department demonstrated its commitment to
education by, among other things: improving access to early learning programs, reforming
elementary and secondary education, making higher education more accessible and affordable,
and working to attract talented people to the teaching profession. The Department also
demonstrated that it is a good steward of financial resources by putting in place well-controlled
and well-managed business and financial management systems and processes.
The AFR also provides high-level financial and performance highlights, assessments of
controls, a summary of challenges, and a demonstration of the Department’s stewardship. This
report is required by legislation and complies with the requirements of the Office of Management
and Budget’s Circulars A-11, Preparation, Submission, and Execution of the Budget; A-123,
Management’s Responsibility for Enterprise Risk Management and Internal Control; and A-136,
Financial Reporting Requirements. The report satisfies the reporting requirements contained in
the following legislation:
 Improper Payments Elimination and Recovery Improvement Act of 2012 (IPERIA)
 Improper Payments Elimination and Recovery Act of 2010
 Government Performance and Results Act (GPRA) Modernization Act of 2010
 Federal Information Security Management Act of 2002
 Reports Consolidation Act of 2000
 Federal Financial Management Improvement Act of 1996
 Government Management Reform Act of 1994
 Chief Financial Officers Act of 1990
 Federal Managers’ Financial Integrity Act of 1982
 General Education Provisions Act
 Department of Education Organization Act of 1979
Federal Student Aid (FSA), a principal office of the Department and a designated Performance-
Based Organization, also produces a separate Annual Report that details their financial and
program performance. Summary level information about FSA activities can be found in the
applicable sections of this report. For more detail on FSA’s performance and financial
information, refer to StudentAid.gov.
Certificate of Excellence
The Department of Education received the Association of
Government Accountants’ Certificate of Excellence in
Accountability Reporting for its FY 2015 AFR.
FY 2016 Agency Financial Report—U.S. Department of Education i
How This Report Is Organized
The AFR is designed to focus on use of federal resources provided to or distributed by the
Department to support its mission, with a particular emphasis on the challenges ahead.
1. Management’s Discussion and Analysis
This section provides information about the Department’s
mission and organizational structure as well as its high-level
performance results, financial highlights, and management
assurances regarding internal controls.
2. Financial Section
This section provides a message from the Chief Financial
Officer, the financial statements and notes, required
supplementary information and supplementary stewardship
information, and the report from the independent auditors.
3. Other Information
This section provides improper payments reporting details, the
schedule of spending, a summary of financial statement audit
and management assurances, and the Office of Inspector
General’s Management and Performance Challenges for
FY 2017 Executive Summary.
4. Appendices
This section provides a listing of selected Department web
links, education resources, and a glossary of acronyms and
abbreviations.
ii FY 2016 Agency Financial Report—U.S. Department of Education
Message From the Secretary
November 14, 2016
Fiscal year 2016 has been an exciting year. I want to take a moment to
share and celebrate what I have seen and learned and reflect on our
progress across the country as our work continues on behalf of
students, teachers, and families.
Our mission at the Department is to promote student achievement and
preparation for global competitiveness by fostering educational
excellence and ensuring equal access. The Department’s FY 2016
Agency Financial Report (AFR), presented here, contains the
Department’s financial and performance highlights over the fiscal year
ending September 30, 2016. During 2016, I set three priorities for the
Department to focus on: first, we must provide continued support for states, districts, and
educators in their work to advance educational equity and excellence for every child; second,
we must be committed to lifting up the teaching profession; and third, we must continue to
progress on advancing access, affordability, and completion in higher education.
Thanks to the work of the Department, states, schools, students, educators, families, and
communities, the country can demonstrate significant progress in education, from early learning
through college.
For example, more of our youngest learners have access to quality preschool than ever before,
through $1.5 billion in federal investments from this agency and more robust state support for
early learning. In 2016, the Department announced another important milestone: America’s
high school graduation rate hit a record high at just over 83 percent, with more traditionally
underserved students graduating. Dropout rates are at historic lows, and more students—
particuarly African-American and Hispanic students—are enrolling in and graduating from
college, representing an expansion of opportunity for millions of students.
Equality of opportunity is a core American value that helps form our national identity, solidify our
democracy, and strengthen our economy. Despite progress, persistent educational opportunity
gaps undermine that ideal across the country. In early FY 2016, however, the nation received a
new tool to improve education for all: the Every Student Succeeds Act (ESSA), which was
signed by the President on December 10, 2015.
ESSA advances equity by upholding critical protections and maintaining dedicated resources for
America’s most disadvantaged students. The law requires that action will be taken to improve
outcomes for students in schools that chronically underperform, that do not improve low
graduation rates over time, and that do not ensure progress for all students. Importantly, ESSA
provides the chance to build on the progress we have made over the last eight years to improve
our elementary and secondary schools, and to ensure that all children receive a rigorous, well-
rounded education that prepares them to thrive in college and careers.
Our public elementary and secondary schools have undergone some of the most significant
changes in decades over the last eight years—work that is being led by educators who are
retooling their classroom practices to adapt to new and higher standards. The Department
continues to support these efforts and knows results will not be seen overnight, so we need to
be patient but not passive in continuing to pursue the goal of preparing all students for success
after high school.
FY 2016 Agency Financial Report—U.S. Department of Education iii
MESSAGE FROM THE SECRETARY
It is critically important to keep a college degree within reach for all families so that our
institutions of higher education act as a bridge, not a barrier, to greater prosperity and self-
fulfillment. There is an urgent need to rein in the unsustainable cost of college and reverse the
devastating slide in state support for higher education—a primary driver behind escalating
tuition.
When it comes to college success, the most expensive degree is the one you never get: an
analysis by the Office of Federal Student Aid last year found that students who drop out of
college with debt and no degree are three times more likely to default on their loans than
borrowers who graduate. Although the percentage of young adults with some college
experience has increased considerably, their likelihood of graduating strongly correlates with
income or racial background, which means that we must shift our attention toward the more
essential metric of success: completion of a high-quality degree.
The good news is that we are making progress toward reimagining higher education in ways
that can make it more accessible, affordable, and, most importantly, scholastically attainable.
We are working to hold institutions accountable for students’ success, and we are working to
provide tools (such as those listed in appendix A) that help students, educators, and
researchers.
Performance Highlights
In the Department’s FY 2014–2018 Strategic Plan, our mission is defined in six strategic goals
and 22 supporting strategic objectives, as well as six programmatic two-year Agency Priority
Goals, which are posted on performance.gov and reported in the FY 2015 Annual Performance
Report and FY 2017 Annual Performance Plan. The performance data the Department reports
are often self-reported by states and other entities, although typically entities reporting the data
provide assurances of the data’s accuracy to the Department. Also, grantees and other
recipients of federal funds disbursed by the Department are subject to monitoring, third-party
audits and reviews of program compliance, and in some cases, specific management
certifications attesting to accuracy and compliance with the Department’s accountability
standards. In addition, the Department uses data system edit checks and program reviews.
The Government Performance and Results Act Modernization Act of 2010 requires agencies to
describe the accuracy and reliability of data presented in the Annual Performance Report and
the Annual Performance Plan. Details of how the Department assesses the completeness and
reliability of the data are reported and presented as part of Appendix A of the FY 2015 Annual
Performance Report and FY 2017 Annual Performance Plan, and known limitations of the data
are also included.
Financial Management
The Department is the smallest of the cabinet-level agencies in terms of staff, with a staffing
level of over 4,200 full-time equivalents (FTE), yet it has the third-largest grant portfolio among
the 26 federal grant-making organizations. Our balance sheet now exceeds $1.1 trillion in
assets, primarily from student loans. The Department had over $1 trillion in loans outstanding at
the end of the year, including new loans made in FY 2016, as well as the balances of old loans
less collections of interest and principal.
Good stewardship of taxpayers’ funds is a priority for our Department, and I have been assured
that the financial data included in this AFR are complete and reliable in accordance with federal
requirements. We received our 15th consecutive unmodified or “clean” audit opinion and no
reported material internal control weaknesses. The financial report includes information and
iv FY 2016 Agency Financial Report—U.S. Department of Education
MESSAGE FROM THE SECRETARY
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vi FY 2016 Agency Financial Report—U.S. Department of Education
Contents
About This Report .......................................................................................................................................... i
How This Report Is Organized .......................................................................................................................ii
Message from the Secretary ......................................................................................................................... iii
Management’s Discussion and Analysis
About the Management’s Discussion and Analysis ...................................................................................... 2
About the Department ................................................................................................................................... 4
The Department’s Approach to Performance Management ......................................................................... 7
Forward-Looking Information ...................................................................................................................... 16
Financial Highlights ..................................................................................................................................... 20
Limitations of the Financial Statements ...................................................................................................... 29
Analysis of Systems, Controls, and Legal Compliance .............................................................................. 30
Secretary’s Statement of Assurance ........................................................................................................... 30
Financial Section
Message from the Chief Financial Officer ................................................................................................... 42
About the Financial Section ........................................................................................................................ 44
Financial Statements ................................................................................................................................... 46
Notes to the Financial Statements .............................................................................................................. 50
Required Supplementary Information ......................................................................................................... 84
Required Supplementary Stewardship Information .................................................................................... 86
Report of the Independent Auditors ............................................................................................................ 92
Other Information
About the Other Information Section ......................................................................................................... 114
Improper Payments Reporting Details ...................................................................................................... 115
Combined Schedule of Spending ............................................................................................................. 132
Summary of Financial Statement Audit and Management Assurances ................................................... 135
Memorandum from the Office of Inspector General ................................................................................. 136
Office of Inspector General’s (OIG) Management and Performance Challenges
for Fiscal Year 2017 Executive Summary .......................................................................................... 137
Freeze the Footprint .................................................................................................................................. 147
Civil Monetary Penalty Adjustment for Inflation ........................................................................................ 148
Appendices
Appendix A: Selected Department Web Links and Education Resources ............................................... 150
Appendix B: Glossary of Acronyms and Abbreviations ............................................................................ 154
FY 2016 Agency Financial Report—U.S. Department of Education vii
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viii FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
DRAFT 10/17/16
Management’s Discussion and Analysis
MANAGEMENT’S DISCUSSION AND ANALYSIS
About the Management’s Discussion and Analysis
The U.S. Department of Education (the Department) continued to enhance the usefulness of the
Fiscal Year (FY) 2016 Agency Financial Report (AFR) by augmenting the report with relevant
web content. To take advantage of the numerous hyperlinks embedded in the report, the
Department recommends reading it on the Internet. The Department’s intent is to provide users
with access to helpful information about the Department and its financial and performance
activities. To help continue to improve the content of the AFR, readers are encouraged to
provide their feedback at AFRComments@ed.gov.
This section highlights information on the Department’s performance, financial statements,
systems and controls, compliance with laws and regulations, and actions taken or planned to
address select challenges.
The Department has demonstrated its commitment to fortifying the education system by
directing federal resources to, among other things: improve access to early learning programs,
reform elementary and secondary education to strengthen critical outcomes, make higher
education more accessible and affordable, and work to attract talented people to the teaching
profession. The Department also demonstrated good stewardship of federal resources by
producing complete and accurate financial reports and ensuring that its business and financial
management systems and processes are well controlled and managed.
Mission and Organizational Structure
This section provides information about the Department’s mission, an overview of its history,
and its structure. The active links include the organization chart and principal offices, a map of
its regional offices, and a link to the full list of Department offices with a description of selected
offices by function.
Discussion of Performance
For the 8th year, the Department elected to produce separate financial and performance
reports. The Agency Financial Report for FY 2016 provides a high-level description of
performance measures and goals based on the FY 2014–18 Strategic Plan. A detailed
discussion of performance information for FY 2016 will be provided in the Department’s Annual
Performance Report to be released at the same time as the President’s FY 2018 Budget. The
Department’s annual performance reports for prior years are available online at
http://www2.ed.gov/about/reports/annual/index.html.
The section includes an overview of performance reporting and a high-level discussion on the
Department’s focus areas for FY 2016–17. The results achieved from Department expenditures
are discussed at a high level in the AFR. For more details about performance, please refer to
the Department’s budget and performance web page and performance.gov. Finally, the
Forward-Looking Information section describes the challenges that the Department aims to
address to achieve progress on Direct Loans, Shared Services, and Enterprise Risk
Management (ERM).
To view information on all Department programs, visit the Department’s website.
2 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial Highlights
The Department expends a substantial portion of its budgetary resources and cash on multiple
loan and grant programs intended to increase college access, quality, and completion; improve
preparation for college and career from prekindergarten through 12th grade (P–12), especially
for children with high needs; and ensure effective educational opportunities for all students.
Accordingly, the Department has included more high-level details about sources and uses of the
federal funds received and net costs by program.
Analysis of Systems, Controls, and Legal Compliance
The Department’s internal control framework and its assessment of controls, in accordance with
Office of Management and Budget (OMB) Circular A-123, Management’s Responsibility for
Enterprise Risk Management and Internal Control, provide assurance to Department leadership
and external stakeholders that financial data produced by the Department’s business and
financial processes and systems are complete, accurate, and reliable. The revised OMB
Circular A-123 is effective for FY 2016 and supersedes all previous versions.
Because the Department produces an AFR, detailed performance reporting is included in the
Annual Performance Report, as specified in OMB Circular A-11, Part 6, Section 260. A high-
level summary of performance is included in the AFR to provide context for reporting of financial
data and assessment of controls.
FY 2016 Agency Financial Report—U.S. Department of Education 3
MANAGEMENT’S DISCUSSION AND ANALYSIS
About the Department
Our Mission
The U.S. Department of Education’s mission is to promote student
achievement and preparation for global competitiveness by fostering
educational excellence and ensuring equal access.
Who We Are. In 1867, the federal government recognized that furthering education was a
national priority and created a federal education agency to collect and report statistical data.
The Department was established as a cabinet-level agency in 1980. Today, the Department
supports programs in every area and level of education.
The Department makes funds and information available to individuals pursuing education,
colleges and universities, state education agencies, and school districts by engaging in four
major types of activities:
 establishing policies related to federal education funding, including distributing funds,
collecting on student loans, and using data to monitor the use of funds;
 supporting data collection and research on America’s schools;
 identifying major issues in education and focusing national attention on them; and
 enforcing federal laws prohibiting discrimination in programs that receive federal funds.
Our Public Benefit. The Department is committed to helping ensure that students throughout
the nation develop skills to succeed in school, college, and the workforce. While recognizing the
primary role of states and school districts in providing a high-quality education, the Department
supports efforts to recruit, prepare, support, retain, and reward outstanding teachers and
leaders in America’s schools. The Department supports efforts to help students succeed
regardless of background or circumstance by establishing challenging content, setting high
expectations for all students, and monitoring academic progress.
The Department’s largest asset is the portfolio of student loans (see the Financial Highlights and
Notes sections). Grants to states are the second-largest item, mostly for elementary and
secondary education, awarded based on statutory formulas (see the chart on page 6). The third
biggest item is student aid to help pay for college through Pell Grants, Work Study, and other
campus-based programs (see the Notes section). The Department supports research, collects
education statistics, enforces civil rights statutes, and also carries out competitive grant
programs to promote innovation (see The Department’s Approach to Performance Management
section).
Regional Offices. The Department has 10 regional offices that provide points of contact and
assistance for schools, parents, and citizens. Regional offices offer support through civil rights
enforcement and federal student aid services to promote efficiency, effectiveness, and integrity
in the programs and operations of the Department. In addition to civil rights enforcement offices
in federal regions, civil rights enforcement offices are located in Washington, D.C., and
Cleveland, Ohio.
Descriptions of the principal offices and overviews of the activities of the Department and its
programs are available on the Department’s website.
4 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
Our Organization in Fiscal Year 2016
This chart reflects the coordinating structure of the U.S. Department of Education.
Interactive and text versions of the FY 2016 coordinating structure of the Department are
available.
FY 2016 Agency Financial Report—U.S. Department of Education 5
MANAGEMENT’S DISCUSSION AND ANALYSIS
FY 2015 Actual Formula Grant Distribution by Region and State
The figures in these tables are made up of funding from multiple programs allocated to
states based on statutory formulas. These do not include discretionary grants, need-based
grants, or federal loans. For more details, view the Department’s State Budget Tables.
West Grades K–12 Postsec All Other Midwest Grades K–12 Postsec All Other
Alaska $ 266 $ 41 $ 12 Illinois $ 1,471 $ 1,243 $ 133
Arizona 820 1,259 78 Indiana 652 801 71
California 3,947 3,985 397 Iowa 276 411 33
Colorado 430 478 49 Kansas 320 251 25
Hawaii 150 77 16 Michigan 1,148 919 107
Idaho 161 163 20 Minnesota 462 544 59
Montana 166 71 16 Missouri 612 581 73
Nevada 246 145 24 Nebraska 203 145 23
New Mexico 355 205 27 North Dakota 117 46 12
Oregon 362 385 56 Ohio 1,246 854 128
Utah 267 373 43 South Dakota 163 100 12
Washington 647 454 65 Wisconsin 549 427 71
Wyoming 107 36 11 TOTAL $ 7,218 $ 6,322 $ 747
TOTAL $ 7,926 $ 7,672 $ 814
Northeast Grades K–12 Postsec All Other
South Grades K–12 Postsec All Other Connecticut $ 319 $ 283 $ 32
Alabama $ 517 $ 508 $ 70 Maine 144 111 20
Arkansas 347 269 54 Massachusetts 644 521 64
Delaware 112 62 16 New Hampshire 122 122 14
Dist. of Columbia 91 141 20 New Jersey 871 601 76
Florida 1,808 1,918 215 New York 2,420 1,933 189
Georgia 1,072 1,017 82 Pennsylvania 1,234 977 143
Kentucky 488 401 57 Rhode Island 129 116 17
Louisiana 617 371 46 Vermont 91 51 18
Maryland 504 411 58 TOTAL $ 5,973 $ 4,715 $ 573
Mississippi 403 308 52 Other Grades Postsec All
North Carolina 962 847 125 K–12 Other
Oklahoma 453 309 51 American Samoa $ 24 $ 4 $ 1
South Carolina 504 395 66 Freely Associated States 7 15 0
Tennessee 652 538 84 Guam 41 14 3
Texas 3,111 2,213 301 Indian Set Aside 240 n/a 37
Virginia 690 687 86 Northern Mariana Islands 17 3 1
West Virginia 214 232 42 Puerto Rico 686 897 80
TOTAL $ 12,542 $ 10,628 $ 1,424 U.S. Virgin Islands 26 4 3
All Other 367 n/a 41
NOTES: Dollars in millions. Detail may not add to totals
TOTAL $ 1,408 $ 938 $ 167
due to rounding. Data are current as of October 21, 2016.
6 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
The Department’s Approach to Performance Management
Performance Management Framework
In accordance with the Government Performance and Results Act (GPRA) Modernization Act of
2010, the FY 2014–18 Strategic Plan is the basis for the Department’s performance
management framework. The Department uses quarterly performance reviews, targeted
strategic initiatives, and outreach to leaders and stakeholders to assess progress and garner
engagement toward achieving strategic goals and outcomes. An outline of the Department’s
Strategic Plan is shown below.
FY 2014–18 Strategic Plan
FY 2016 Agency Financial Report—U.S. Department of Education 7
MANAGEMENT’S DISCUSSION AND ANALYSIS
8 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
The FY 2014–18 Strategic Plan is comprised of six strategic goals, which serve as the
foundation for establishing long-term priorities. The strategic objectives are actions that the
Department will undertake to realize the goals. For each objective, the Department has
established measures to gauge its progress. In collaboration with OMB and alongside the
release of the President’s FY 2017 budget request, the Department announced its FY 2016–17
Agency Priority Goals (APGs) and is reporting quarterly updates on performance.gov. The
Department monitors progress toward its strategic goals and its APGs using data-driven review
and analysis. This focus promotes active management engagement across the Department.
Additional information on performance management is available in the Annual Performance
Plans and Annual Performance Reports.
The Department welcomes input from Congress, state and local partners, and other education
stakeholders on its Strategic Plan and APGs. Questions or comments about the Department’s
performance management framework and reporting should be e-mailed to PIO@ed.gov.
Information in the Agency Financial Report
The Department has elected to produce separate financial and performance reports. Because
the Department does not produce a Performance and Accountability Report, specific
performance reporting related to the Department’s Strategic Plan may be found in the Annual
Performance Report, published with the Budget of the United States Government (President’s
Budget), and available on both ed.gov and the government website performance.gov.
Performance information in the Department’s AFR is limited to high-level, cross-cutting themes
with links to help the reader find further details on metrics and trends regarding specific
objectives. We also urge readers to seek programmatic data as it is reported in the
Congressional Budget Justification, as well as on the web pages of individual programs.
The high-level discussion of performance information in this year’s AFR includes performance
matters that inform decisions of the Department and its partners. Discussions on challenges
concerning operations and finance are provided in a section of the AFR that follows the
Department’s Financial Highlights.
U.S. Department of Education FY 2016 Priorities
The mission of the Department is to promote student achievement and preparation for global
competitiveness by fostering educational excellence and ensuring equal access. With this
mission and challenging, far-reaching strategic goals, the Department has chosen to focus
FY 2016 efforts in three areas. These areas, as noted in the Secretary’s message, are:
(1) advancing equity and excellence; (2) expanding support for teachers and school leaders;
and (3) promoting access, affordability, and completion in higher education. In addition, the
Department has continued to encourage grantees and practitioners to use data and evidence to
improve student outcomes. The following sections highlight a portion of the Department’s
innovative work in these areas.
Advancing Equity and Excellence
The Department continues to be true to its mission to promote and support equal access to a
quality education, from preschool through high school graduation and beyond. That vision
includes efforts to improve student achievement and raise graduation rates; make education
more equitable; ensure all students achieve at high standards that prepare them for college and
careers; enhance the quality of assessments; and increase access to high-quality early learning.
FY 2016 Agency Financial Report—U.S. Department of Education 9
MANAGEMENT’S DISCUSSION AND ANALYSIS
Early in FY 2016, the Every Student Succeeds Act (ESSA), which replaced the No Child Left
Behind Act as the latest authorization of the Elementary and Secondary Education Act (ESEA),
passed by substantial bipartisan majorities and was signed by President Obama. ESSA
embraces many of the priorities and initiatives created or championed by the Obama
administration, such as state-determined, college- and career-ready standards for every student
and aligned statewide assessments that provide educators, parents, and communities with
critical information each year on student progress; state-driven accountability systems that
meaningfully differentiate between schools based on multiple measures; a commitment to
ensuring more of our youngest learners have access to high-quality early learning opportunities;
locally tailored systems for school improvement that include evidence-based interventions; and
education innovation through a successor to this administration’s Investing in Innovation (i3)
program. The Department is focused on supporting states in the implementation of the ESSA to
ensure that it provides equal educational opportunities for all students and preserves the
ESEA’s legacy as a civil rights law.
ESSA advances equity by upholding critical protections and maintaining dedicated resources for
America’s most disadvantaged students. The law requires that action will be taken to improve
outcomes for students in schools that are among the lowest performing 5 percent of Title I
schools in the state, that fail to graduate over one-third of their students, and where any
subgroup of students is consistently underperforming. ESSA also creates opportunities for
states to reclaim the goal of a rigorous, well-rounded education for every child — an education
that not only includes math and reading, but also provides all students with access to other
subjects, such as science, social studies, world languages, the arts, physical education, health,
and other key areas of study. As soon as ESSA became law, the Department began developing
materials to support its implementation at the state and local level. To date, the Department has
published Notices of Proposed Rulemaking (NPRMs) on Title I Accountability, State Plans and
Reports Cards, Assessments (Part A and Part B), and Supplement Not Supplant. In addition, six
ESSA significant guidance documents have been announced.
The Department continues to build on its commitment to high-quality early childhood education
through the Race to the Top — Early Learning Challenge (Early Learning Challenge) program
and Preschool Development Grants, which together have invested $1.5 billion in early learning
across the country. The Early Learning Challenge, which the Department jointly administers with
the Department of Health and Human Services, currently supports 20 states that are
implementing a cohesive system of quality early learning programs and services for young
children from birth through age 5. In addition, Preschool Development Grants have served as a
down payment on the President’s vision for universal, voluntary access to high-quality preschool
by providing high-quality learning experiences to children in 230 communities across 18 states.
Progress: As states develop their new plans to implement ESSA and support educational
opportunity for all students, P–12, the nation’s graduation rate is at its highest point ever — at
83 percent. Especially encouraging is that more historically underserved students, including low-
income students, English learners, and students with disabilities, are graduating from high
school and going to college. In fact, the progress of black and Hispanic students since 2011 has
outpaced the growth of all other racial/ethnic groups. Further, in the fall of 2015, Preschool
Development Grant states enrolled 28,000 4-year-olds in high-quality programs supported by
the grants; 35,000 more 4-year-olds were enrolled in those programs in the fall of 2016.
However, significant challenges remain — today, only 41 percent of all 4-year-olds in the United
States are enrolled in publicly funded preschool through state programs, Head Start, or special
education. Even fewer are enrolled in the highest-quality programs.
10 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
In FY 2016, the Department announced a new set of APGs. Among other efforts, the
Department is working to increase enrollment in high-quality state preschool programs and
ensure equitable educational opportunities. Two measures of our efforts to advance equity and
excellence are shown below.
Percentage of 4-year-old Children Enrolled in State Gap in the Graduation Rate Between Students
Preschool Programs from Low-Income Families and All Students
40%
35% 9.0%
Actual 33% 7.6%
35% Value 31% 8.0% 7.4%
8.3% 8.1%
Target 7.7%
30% 7.0%
Value 7.1%
29% 29% 6.0%
25% 27% 28% 28%
24% 25% 5.0% Actual
20% 22%
20% Value
4.0%
15% Target
17%
3.0% Value
10%
2.0%
5% 1.0%
0% 0.0%
2013-Q4
2014-Q4
2015-Q4
2016-Q4
2017-Q4
2006-Q4
2007-Q4
2008-Q4
2009-Q4
2010-Q4
2011-Q4
2012-Q4
2013-Q4
2014-Q4
2015-Q4
2016-Q4
2017-Q4
Data Source for Percentage of 4-year-old Children Enrolled: National Institute for Early Education Research
Yearbook (The State of Preschool).
Note: Assumptions for the years predating FY 2014 do not align the school year with the fiscal year. Data beginning
with FY 2014 align the school year with the actual fiscal year; however, the data are not available to be reported until
the following fiscal year.
Data Source for Gap in the Graduation Rate: EDFacts.
Note: Data represent the previous school year’s data. For example, School Year 2014–15, which corresponds to
FY 2015, is being reported in FY 2016.
Expanding Support for Teachers and School Leaders
Research shows what many of us know: a great teacher is the most important in-school factor
contributing to student achievement.1,2 It also shows that the quality of the teacher at the head
of the classroom is dramatically impacted by the school leader.3 Effective school leaders ensure
the skillful recruitment and placement of quality teachers. Not only that, but teachers themselves
report that the quality of school leadership is often one of the biggest factors in both short- and
long-term teacher retention, as well as teacher job satisfaction.4 Yet, too many young people —
especially students of color, low-income students, and other historically underserved children
and youths— do not have access to the teachers and school leaders who can best help them
1 Rivkin, S. G., Hanushek, E. A., & Kain, J. F. (2005). Teachers, schools, and academic achievement. Econometrica,
73(2), 417–458.
2 Aaronson, D., Barrow, L., & Sander, W. (2007). Teachers and student achievement in the Chicago public high
schools. Journal of Labor Economics, 25(1), 95–135.
3 See for example Branch, G., Hanushek, E. A., & Rivkin, S. G. (2012). Estimating the effect of leaders on public
sector productivity: The case of school principals. Washington, DC: National Center for Analysis of Longitudinal Data
in Education Research.
4 U.S. Department of Education, National Center for Education Statistics, Schools and Staffing Survey (SASS)
“Public School Teacher Data Files,” and “Private School Teacher Data Files,” 2011–12.
FY 2016 Agency Financial Report—U.S. Department of Education 11
MANAGEMENT’S DISCUSSION AND ANALYSIS
succeed.5 The Department has worked to help states and school districts support great
educators.
For example, the Department launched the Excellent Educators for All initiative and called on
states to develop plans that would give low-income students the same access to high-quality
educators as their more affluent peers. In addition, the Department recently published
regulations to increase transparency and establish feedback loops to help teacher preparation
programs and states ensure that educators are ready to succeed in the classroom. While giving
states the flexibility to determine how program performance is measured, such as how
graduates are having an impact on student learning in the classroom, the regulations build on
reforms and innovations already happening at the state and local levels across the country.
The Department continued to support Teach to Lead, a project that leverages the experience
and expertise of teachers to lead transformation of the teaching profession and bring about
better outcomes for students. Today, Teach to Lead continues its efforts to support teacher
leadership by hosting regional leadership summits that spotlight and advance the
groundbreaking, teacher-led work in states, districts, and schools across the country.
With the passage of the ESSA, states and districts have a great opportunity to reimagine
systems and strategies to better support educators in accelerating students’ performance. For
example, the Department published Title II, Part A Guidance addressing three areas of
opportunity: Support for Educators, Educator Equity, and Strengthening Title II, Part A
Investments. It is essential that we build upon the progress made with the passing of ESSA if
we are to provide every student with a rich, rigorous education.
Progress: Under the Excellent Educators for All initiative, the Department supported a
$4.2 million technical support network to help states plan their efforts to increase equitable
access. The Department then published a report that highlighted which states and districts fared
well or poorly on teacher equity. In addition, more than 40 states have committed to developing
teacher and principal evaluation and support systems that reflect the goal of ensuring that these
systems provide meaningful, actionable feedback to educators to improve their practice and
increase student outcomes.
Promoting Access, Affordability, and Completion in Higher Education
Skills and education promote success, and that makes a college education one of the best
investments people can make in their futures. Americans with college degrees are more likely to
live healthier lives, be more civically engaged in their communities, have good-paying jobs, and
experience greater job security. America’s students, families, and the economic strength they
provide depend on a higher education system that helps everyone succeed. Achieving this goal
requires making college more accessible, affordable, and accountable — especially for
historically underserved students — and ensuring that students graduate in a timely way and
with a meaningful degree as the basis to thrive in careers and life. That is why President Obama
has worked throughout the eight years of his administration to increase college affordability,
access, and completion. Since 2009, the Department has taken strong actions to offset the
rising costs of higher education, including by making historic investments in federal student aid,
such as expanding Pell Grants — federal financial aid offered to undergraduate students — and
making student debt more manageable. The President raised the maximum Pell Grant by more
5Glazerman, Steven and Jeffrey Max. “Do Low-Income Students Have Equal Access to the Highest-Performing
Teachers?” NCEE Evaluation Brief. Washington, D.C.: U.S. Department of Education, Institute of Education
Sciences, National Center for Education Evaluation and Regional Assistance. Document No. PP11-23a, 2011.
12 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
than $1,000 over the course of his administration, and, for the first time, tied the grant amount to
inflation. In 2010, the Obama administration made a landmark investment in the Pell program
through the Health Care and Education Reconciliation Act, which ended student loan subsidies
for private banks and shifted more than $60 billion in savings back to students and taxpayers.
Among the ways to boost college completion is by ensuring that students and families have
information to help them apply to and enroll in a school that will help them achieve their
educational goals. The Department built a new College Scorecard, which helps students,
families, and those who advise them to make better decisions about one of the most significant
financial decisions students will make in their lifetimes — where to go to college. The College
Scorecard includes comprehensive, reliable data published on students’ employment outcomes
and success in repaying student loans. Both the Department and other third-party developers
are incorporating the data and the tool into their outreach directly to students, ensuring students
and families have the information they need to find the schools that are right for them.
Another key is helping students and their families obtain financial aid by making it easier and
faster for them to fill out the Free Application for Federal Student Aid (FAFSA). With this
understanding, the Obama administration took major steps to streamline the FAFSA. Today,
more than 99 percent of the FAFSA applications are submitted online. Moreover, among
2014–15 applicants who had filed their taxes, 58 percent of independent students and
46 percent of parents of dependent students, or over 6 million students and parents, had used
the Internal Revenue Service (IRS) Data Retrieval Tool, which allows students and parents to
access and automatically transfer their IRS tax return information into the FAFSA. Finally,
starting October 1, 2016, for 2017–18 applicants, students and families now can apply for
financial aid earlier — as the college application process gets underway — rather than in January,
and most families can now electronically retrieve their tax information filed for an earlier year
from the IRS Data Retrieval Tool to use on the FAFSA, rather than waiting until tax season to
complete their applications.
In addition, the Department has taken comprehensive actions to protect students and taxpayers
from the subset of institutions that engage in fraudulent, deceptive, and other predatory
practices. That includes implementing the gainful employment rules to hold career colleges
accountable for their students’ outcomes; publishing the borrower defense regulations to create
a streamlined process that is fair to students who may have been victims of fraud and to hold
colleges accountable for risky behavior; regulations to ensure the integrity of the federal student
aid programs; and increased rigor in reviewing and holding accountable colleges and
accrediting agencies.
Progress: The Department’s efforts to increase financial aid helped cover the cost of college by
about $3,700 for more than 8 million students last year, and approximately 2 million additional
Pell Grants have been awarded to students every year since the President took office. In
addition to keeping student loan interest rates low, a reform that could save a typical student
$1,000 over the life of his or her loan, the Obama administration improved and expanded
income-driven loan repayment options to ensure loan payments remain affordable. With these
plans, borrowers set their monthly student loan payment at an amount based on income and
family size. As of September 2016, income-driven repayment plans have enabled more than
5 million borrowers to take advantage of affordable repayment plans based on students’
incomes, up from 700,000 borrowers in 2011. Additionally, borrowers who have committed to
careers in public service can have their loans forgiven after 10 years through the Department’s
Public Service Loan Forgiveness program.
FY 2016 Agency Financial Report—U.S. Department of Education 13
MANAGEMENT’S DISCUSSION AND ANALYSIS
The Department has established an APG to increase college degree attainment and continues
its efforts to improve affordability, access, and student outcomes in higher education.
Increase in Degree Attainment among 25–34-Year-Old Age Cohort
46.8% 48.4%
50.0% 44.7% 45.6%
45.0%
44.8% 45.7% 46.5%
40.0% 43.1% 44.0%
35.0%
Actual
30.0%
Value
25.0% Target
20.0% Value
15.0%
10.0%
5.0%
0.0%
2012-Q4
2013-Q4
2014-Q4
2015-Q4
2016-Q4
2017-Q4
Data Source: NCES Digest of Education Statistics, Table 104.30, Number of persons age 18 and over, by highest
level of educational attainment, sex, race/ethnicity, and age: 2015. Tabulated from Current Population Survey data,
U.S. Census.
Developing and Using Data and Other Evidence
The Obama administration’s robust support of evidence-based innovation gives states and
school districts tools to direct their education improvement efforts toward the most effective
practices. With a focus on new and promising efforts backed by research, the administration
helped schools and communities create supports, partnerships, and programs to help educators
tackle persistent challenges, accelerate achievement for all children and youth, and target
interventions for students who were historically underserved and most vulnerable.
The Department has pioneered efforts that encourage grantees and practitioners to use
evidence and data in ways that improve student outcomes. The Department has significantly
scaled up the use of evidence-based grant-making. i3, an evidence-based grant program that
was also born out of this priority for increased innovation in education, has invested more than
$1.3 billion in nearly 160 projects, reaching over 2 million students in all 50 states and the
District of Columbia. As part of i3, projects were required to undergo a rigorous, independent
evaluation and to share the results publicly, helping to identify strategies that enable students to
excel and that educators can adopt or adapt. This work is expanding the knowledge base that
the education field can use to help students make even greater progress in the years ahead.
InformED is an initiative launched in 2016 to transform how the Department makes information
available and actionable for internal users and the public, using open data and data
transparency design concepts. The InformED initiative is building on lessons learned from the
success of the College Scorecard and applying these lessons across the education spectrum,
from early childhood to adult education. With resources and intuitive tools tailored to different
audiences (such as researchers, policymakers and journalists), InformED is pulling together the
Department’s diverse array of data and studies on a particular topic, and allowing open data
access to help unlock answers to pressing education questions and needs.
Progress: The Department is on track for 18 percent of new FY 2016 discretionary grant
funding to support evidence-based practices. The i3 program has released 17 rigorous
14 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
evaluations that can inform the field. Through InformED, the Department has launched
numerous new products that have generated significant public interest. For example, data from
the Civil Rights Data Collection have been downloaded over 2,700 times. In addition, more than
1.5 million users have accessed the College Scorecard since September 12, 2015.
The Department has established an APG to enable evidence-based decision making. The
graphs below show measures of our efforts to increase use and generation of credible evidence
on what works and what does not work in education.
Percentage of New Competitive Grant Dollars that Number of Department-funded Project
Support Evidence-Based Strategies Evaluations that Provide Credible Evidence
about What Works in Education
35.0% 25
29.4%
30.0%
20 20 20 20 20
25.0% 17
15 Actual
20.0% 20% Value
15.9% 18%
15.0% Actual 10 Target
10
Value Value
10.0% 11%
9% Target
5
Value
5.0%
0.0% 0 2016-Q4
2017-Q1
2017-Q2
2017-Q3
2017-Q4
2014-Q4
2015-Q4
2016-Q4
2017-Q4
Data Source for Percentage of New Competitive Grant Dollars: Forecast Report issued by the Office of the Chief
Financial Officer (OCFO) and final Funding Reports from relevant programs.
Note: Q4 data not yet available but expected in FY 2017.
Data Source for Number of Department-funded Project Evaluations: Discretionary grant slate memoranda,
discretionary grant financial forecasts and reports from OCFO, and the What Works Clearinghouse.
FY 2016 Agency Financial Report—U.S. Department of Education 15
MANAGEMENT’S DISCUSSION AND ANALYSIS
Forward-Looking Information
This section summarizes information pertinent to the Department’s future progress and success.
Direct Loan Program
The Department’s largest program, the William D. Ford Federal Direct Loan (Direct Loan)
program, provides students and their families with funds to help meet postsecondary education
costs. Easing the burden of student loan debt is a significant priority for the Department. The
following is a discussion of (1) the steps the Department has taken to ensure that student debt
is manageable and (2) the risks inherent in estimating the cost of the program.
Managing Student Loan Debt
Each year, federal student loans help millions of Americans obtain a college education—an
investment that, on average, has high returns. While the average returns to a college degree
remain high, substantial inequities in outcomes exist, and some students leave school poorly
equipped to manage their debt, whether due to limited labor market opportunities or high debt.
Traditionally, federal loans of this type have had flat 10-year repayment schedules, making it
difficult for borrowers to pay at the start of their career when their salaries are lower. The recent
introduction and expansion of the Pay As You Earn (PAYE) and related income-driven
repayment plans grant students the opportunity for greater financial flexibility as it pertains to
their monthly payment. For more details on these plans, visit FSA’s How to Repay Your Loans
Portal.
As the labor market declined during the financial crisis of 2008, serious challenges in student
debt repayment came to the forefront of conversations. The availability of income-driven
repayment plans like PAYE and an improving labor market has led to substantial improvement,
signifying Departmental progress in the focus area of higher education, namely, its efforts to
innovate loan program guidelines in order to make student loan debt more manageable for
borrowers across the board. Recent trends in student loan repayment data show that
 More than 80 percent of Direct Loan recipients with loans in repayment are current on their
loans.
 Growing numbers of borrowers are taking action and responsibility with regard to their
student loans when they are in need of modifications and support. More than five million
Direct Loan borrowers have enrolled in PAYE and income-driven repayment options, a
substantial increase from the same figure from 2011—an enrollment of 700,000 borrowers.
 Cohort default rates for the most recent cohort of Direct Loan borrowers to enter repayment
have declined for the third straight year.
The Department has made progress in this area and continues to work relentlessly to make
student debt more manageable. Looking to the future, the Department will build on its recent
successes by:
 Conducting significant outreach efforts to inform student loan borrowers of their repayment
options, including the protections provided by income-driven repayment plans. The
Department has announced a goal of enrolling two million more borrowers in plans like
PAYE during the next year.
16 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
 Reinventing customer service to ensure that borrowers have access to an affordable
repayment plan, high-quality customer service, reliable information, and fair treatment.
 Continuing to support additional tools like the College Scorecard and Financial Aid Shopping
Sheet to increase transparency around higher education costs and outcomes, in an effort to
help students and families make informed decisions before college enrollment.
 Further protecting student borrowers and taxpayers against predatory practices by
postsecondary institutions with recently issued Borrower Defense regulations. These
regulations clarify and simplify existing regulations that grant students loan forgiveness if
they were defrauded or deceived by an institution of higher education or technical training.
 Launching an experiment to test the effectiveness of new types of, and more frequent, loan
counseling for student borrowers. The experiment will test whether requiring additional loan
counseling is effective in boosting academic outcomes and helping students manage their
debt.
Managing Risks and Uncertainty Facing the Direct Loan Program
Direct Loan program costs are estimated consistent with the terms of the Federal Credit Reform
Act of 1990. Under the Act, the future costs and revenues associated with a loan are estimated
for the entire life of the loan, up to 40 years in this case. The actual performance of a loan
cohort tends to deviate from the estimated performance during that time, which is not
unexpected given the inherent uncertainty involved in developing estimates. There are three
types of risk that make estimating lifetime program costs a difficult task.
Legislative, Regulatory, and Policy Risk
There are inherent risks from the possibility that the cost structure of the Direct Loan program
may be altered through legislative, regulatory, or administrative action. In addition, even recent
legislative, regulatory, and policy action may be difficult to interpret with regard to effects on
financial modeling and estimation, given the lack of actual trend data availability. Some
examples of current risks include the following:
Income-Driven Repayment Plans: Several new income-driven repayment plans have been
introduced in recent years, including Income-Based Repayment, PAYE, and Revised Pay As
You Earn. In general, the proliferation of plans has made income-driven repayment terms more
generous and made the plans available to a greater number of borrowers. The Department has
also engaged in an outreach campaign to broaden borrower awareness of these plans. These
trends have affected recent cost re-estimation significantly through changing the absolute cost
of the plans as well as increasing participation in the plans.
Public Service Loan Forgiveness: Enacted in 2007, the Public Service Loan Forgiveness
(PSLF) program allows a Direct student loan borrower to have the balance of their Direct
student loans forgiven after having made 120 qualifying monthly payments under a qualifying
repayment plan, while working full time for a qualifying public service employer (such as
government or not-for-profit organization). There is still uncertainty as to how many borrowers
will take advantage of the program. Much of this uncertainty arises because borrowers do not
need to apply for the program until after having made the 120 qualifying monthly payments.
While data on current applications is helpful to gauge potential forgiveness, it may not be
representative of final participation figures. In addition, since the first date by which a borrower
could receive forgiveness under this program is October 1, 2017, the Department does not yet
have a robust set of actual forgiveness data. The available data on borrowers who have already
certified their employment, nearly 500,000 borrowers as of September 2016, is less valuable
FY 2016 Agency Financial Report—U.S. Department of Education 17
MANAGEMENT’S DISCUSSION AND ANALYSIS
than it appears since it does not track breaks in their repayment or qualifying employment. The
Department continues to remain informed on and manage the risk that may arise in relation to
uncertainty about the effect of further borrower outreach on boosting participation in the PSLF
program.
Borrower Defense: In May 2015, Corinthian Colleges, Inc. (Corinthian), a publicly traded
company operating numerous postsecondary schools that enrolled over 70,000 students at
more than 100 campuses nationwide, filed for bankruptcy under deteriorating financial
conditions and while subject to multiple state and federal investigations. The Department
received thousands of claims for student loan relief from Corinthian students under a provision
in the Higher Education Act of 1965 (HEA) referred to as “borrower defense.” In August 2015,
the Department initiated a rule-making process to establish a more accessible and consistent
borrower defense standard to clarify and streamline the borrower defense process to protect
borrowers. Since Corinthian, several other postsecondary schools have closed under similar
circumstances, including ITT Technical Institute. The overall financial impact of activity that
could lead to valid borrower defense claims, particularly in the for-profit postsecondary sector,
coupled with the impact of the recently issued Borrower Defense regulations, is an area of
uncertainty. The Department continues to monitor instances of this risk factor to its programs.
Estimation Risk
Actual student loan outcomes may deviate from estimated student loan outcomes, which is not
unexpected given the long projection window of 40 years. The complexity of the Direct Loan
program, as exemplified by the multitude of available projection paths and possible outcomes,
results in inherent uncertainty. For example, estimates that need to be made for loans
originating in FY 2016 include how long students will remain in school; what repayment plan will
be chosen; whether the loan will be consolidated; whether the borrower will die, become
disabled, bankrupt, or have another claim for discharge or forgiveness (closed, borrower
defense, etc.); if the loan will go into deferment or forbearance; if the loan will go into default
and, if so, what collections will be received on the defaulted loan; and if the loan is in income-
driven repayment, what the borrower’s employment (public sector or not) and income and family
status will be over the next 25 years. These estimates are not only extremely difficult to make
but are subject to change if future student behaviors deviate from past experience. Lastly, the
Direct student loan portfolio has grown from around $380 billion in FY 2011 to around $960
billion as of the end of FY 2016. This growth naturally results in increased re-estimates, since a
re-estimate worth 1 percent of the portfolio today would be more than twice as large as a similar
re-estimate in FY 2011 ($9.6 billion vs. $3.8 billion).
Macroeconomic Risk
There is inherent risk due to the long-term nature of the subsidy estimates, as well as the
underlying uncertainty in projecting macroeconomic variables many years into the future. Some
examples include the following:
Interest Rates: Direct Loan subsidy estimates are very sensitive to changes in interest rates.
Recent interest rate history has been anomalous, as interest rates have continued to remain
lower than their historical averages. Future interest rate “shocks” could result in actual subsidy
costs that deviate from estimated subsidy costs. Under the current program terms, the fixed
borrower rates for direct loans are established in advance of the upcoming school year, while
the Treasury fixed interest rate on borrowings to fund those loans is not set until after those
awards are fully disbursed, which can be as much as 18 months later. Unexpected changes in
interest rates during this time can significantly impact the subsidy cost of these loans.
18 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
Unemployment: The financial crisis of 2008 and ensuing spike in unemployment rates had a
dramatic effect on both student loan volume and student loan performance. Student loan
volume peaked along with unemployment, as many displaced workers sought higher education
opportunities. Student loan performance suffered as many borrowers repaying their loans were
left with much less disposable income with which to make their loan payments. For example,
default rates for students in two-year schools, which were at a low of 4.6 percent, for loans
entering repayment in 2005, began an upward trend reaching as high as 10.0 percent for loans
entering repayment in 2011. While recessions and economic downturns are cyclical
phenomena, their exact timing and impact on the subsidy estimates remain an area of
uncertainty.
Wage Growth: The estimated costs of income-driven repayment plans are largely dependent
on trends in observed wage growth. To the extent that future wage growth deviates significantly
from prior wage growth, actual subsidy costs of income-driven repayment plans may deviate
from projected subsidy costs. The Department continues to manage risks in this area by
continuing to learn about its borrower base and remain informed on such labor market statistics.
Continuous Improvement
Improving critical infrastructure, systems, and overall capacity and ensuring sound strategic
decision making regarding allocation of resources are essential to the Department’s future
progress and success. Exploring the use of shared services and incorporating enterprise risk
management are two of the Department’s key initiatives.
Shared Services
In alignment with OMB Memorandum M-13-08 and the Office of Financial Innovation and
Transformation’s Federal Agency Modernization Evaluation framework, the Department and
Treasury’s Administrative Resource Center (ARC) explored ARC’s existing core financial
management system and its ability to meet the Department’s modernization requirements.
During FY 2016, the Department and ARC collaboratively delivered a high-level Readiness
Assessment Report on migration to ARC’s solution set. Beginning in FY 2017, the Department
and ARC will restart discussions at a more detailed level regarding the Department using ARC’s
Shared Service solution set for its core financial system.
Enterprise Risk Management
The Department recently established an Enterprise Risk Management Council. The purpose of
the council is to promote effective mission achievement by incorporating enterprise risk
management into the basic fabric of how the Department conducts strategic decision making
and allocates resources. The council serves as the primary governance structure and
coordination point for enterprise-level direction setting with regard to risk management as
required by OMB Circular A-123, Management’s Responsibility for Enterprise Risk Management
and Internal Control. In FY 2017, the council will oversee the development of a risk profile and
work to increase the consistency and integration of risk management practices across the
Department.
FY 2016 Agency Financial Report—U.S. Department of Education 19
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial Highlights
Introduction
This section provides summarized information and analyses about the Department’s assets,
liabilities, net position, sources and uses of funds, program costs, and related trend data. It also
provides a high-level perspective of the detailed information contained in the financial
statements and related notes.
The Department consistently produces complete, accurate, and timely financial information. The
Department’s financial statements and notes are prepared in accordance with accounting
principles generally accepted in the United States for federal agencies issued by the Federal
Accounting Standards Advisory Board and the format and content specified by OMB Circular
No. A-136, Financial Reporting Requirements. The financial statements, notes, and underlying
business processes, systems, and controls are audited by an independent accounting firm with
audit oversight provided by the Office of Inspector General (OIG). For 15 consecutive years, the
Department has earned an unmodified (or “clean”) audit opinion. The financial statements and
notes for FY 2016 are on pages 46–83 and the Independent Auditors’ Report begins on
page 92.
Balance Sheet
The consolidated balance sheet presents, as of a specific point in time (the end of the fiscal
year), the Department’s total assets, total liabilities, and net position.
The Department’s assets totaled
$1,174.8 billion as of September 30,
2016. The vast majority of the assets
relate to credit program receivables,
which comprised 91.6 percent of all
assets. Direct loans comprise the largest
share of these receivables, totaling
$958.9 billion. All other assets totaled
$98.2 billion, most of which was Fund
Balance with Treasury.
The Department’s liabilities totaled
$1,142.0 billion as of September 30,
2016. As with assets, the vast majority of
the Department’s liabilities are associated
with credit programs, primarily amounts
borrowed from the U.S. Department of
the Treasury (Treasury) to fund student
loans. This debt totaled $1,127.8 billion
as of September 30, 2016.
20 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
The chart to the left shows the changes in
the Direct Loan receivables components
over the past five years. The principal
continues to grow as the Direct Loan
program has originated all new federal
loans since July 2010. However, the rate of
increase in principal has slowed, as the
Direct Loan program has originated fewer
new loans each year since FY 2012 as a
result of stagnant and in some cases
declining enrollment, coinciding with the
recovery from the 2007–09 recession.
Even so, new loan disbursements continue
to exceed overall loan principal
repayments—student loan borrowers now
have more options to stretch out their
repayment terms and reduce their monthly
payments.
The positive allowance for subsidy
represents an estimate of funds expected
to be recovered in excess of principal
loaned less anticipated defaults, loan
cancellations, and other adjustments. This positive allowance for subsidy results primarily from
the difference between the interest rates charged by the Department to borrowers and the
interest rates charged to the Department on amounts borrowed from Treasury to make the
loans. The reduction in the allowance since FY 2013 is due primarily to higher subsidy costs,
the main cause being high participation in income-driven repayment plans. Participation in
income-driven repayment plans has increased as (a) new plans have become available that are
more advantageous to borrowers, (b) new plans have become available that expand the
potential pool of borrowers, and (c) the Department has conducted targeted outreach to
borrowers to make them aware of their potential eligibility for these plans.
The table on the right shows the
payment status of the Direct Loan Payment Status of Direct Loan Principal and Interest Balances
principal and interest balances (Dollars in Billions)
outstanding. The Current FISCAL YEAR
Repayment category consists of Loan Status 2013 2014 2015 2016
loans that are being paid back on
Current Repayment $188.5 $247.2 $332.0 $406.8
time, including the current portion
of loans refinanced pursuant to Payments Temporarily Postponed $336.0 $379.6 $387.3 $396.1
income-driven repayment plans. Delinquent $47.8 $54.6 $65.1 $71.8
The Payments Temporarily Default/Bankruptcy/Other $41.5 $49.8 $60.7 $78.9
Postponed category includes
payments that have been Total Dollar Amount of Direct Loans Outstanding $613.8 $731.2 $845.1 $953.6
temporarily suspended due to
circumstances such as current Total No. of Direct Loan Recipients (in Millions) 25.6 27.9 29.9 31.5
enrollment in school, grace
periods, and financial hardships.
FY 2016 Agency Financial Report—U.S. Department of Education 21
MANAGEMENT’S DISCUSSION AND ANALYSIS
Loans in the Delinquent category
are considered in “repayment”
status, but payments are anywhere
from 31 to 360 days late.
Default/Bankruptcy/Other includes
loans that are over 360 days
delinquent (default status); loans in
a nondefaulted bankruptcy status;
and loans in disability status. The
percentage of loans in default
continues to grow, even as
delinquencies and new defaults
have declined, because defaulted
loans can be difficult to collect on or
rehabilitate. The percentage of the portfolio in current repayment, which rose from 31 percent in
FY 2013 to 43 percent in FY 2016, has eclipsed payments temporarily postponed and has
grown far faster than loans in default. This trend coincides with an improving economy and
matches what has been seen in other areas of commercial lending.
The Department borrows funds to disburse new loans and pay credit program outlays and
related costs. The Department repays Treasury after consideration of cash position and the
liability for future cash outflows as mandated by the Federal Credit Reform Act of 1990 (FCRA).
The chart to the above right shows the Direct Loan program cumulative borrowing and
repayment activity that resulted in the debt amount on the balance sheet. A diagram depicting
the Direct Loan program financing process is displayed with related trend data on page 23 of
this report.
Statement of Net Cost
The consolidated statement of net cost reports the Department’s components of the net costs of
operations for a given fiscal year. Net cost of operations consists of the gross cost incurred less
any exchange (i.e., earned) revenue from activities. Gross cost is composed of the cost of credit
and grant programs, and operating costs. Exchange revenues are primarily interest earned on
credit program loans.
22 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
FY 2016 Agency Financial Report—U.S. Department of Education 23
MANAGEMENT’S DISCUSSION AND ANALYSIS
Analysis of Direct Loan Program Subsidy Expense
One of the components significantly impacting the Department’s gross costs pertains to the
estimated subsidy expense of the Direct Loan program. The Department’s gross costs can
fluctuate significantly each year as a result of changes in the estimated subsidy expense.
Subsidy expense is an estimate of the cost of providing direct loans, but excludes the
administrative costs of issuing and servicing the loans. The Department estimates subsidy
expense using economic models that project cash flows on a net present value basis.
The Department estimates subsidy costs annually for new loans disbursed in the current year;
updates the previous cost estimates for outstanding loans disbursed in prior years (subsidy
re-estimates); and updates previous cost estimates based on changes to terms of existing loans
(subsidy modifications). The following chart shows these three components of the Direct Loan
program subsidy expense for the past five years.
Factors such as interest rates charged to the borrower, interest rates on Treasury debt, default
rates, fees, and other costs impact the estimated cost calculation and determine whether the
overall subsidy expense is positive or negative. Subsidy expense for new loans disbursed in the
current year have been negative in recent years primarily because lending interest rates
charged were greater than the historically low rates at which the Department borrowed from
Treasury. In practical terms, a negative subsidy occurs when the interest and/or fees charged to
the borrower are more than sufficient to cover the interest on Treasury borrowings and the costs
of borrower default.
24 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
The costs of the Direct Loan program are highly sensitive to changes in actual and forecasted
interest rates. For example, in FY 2016, a 1 percent increase in projected borrower interest
rates would reduce projected Direct Loan subsidy cost by $4.8 billion.
Policy changes to student loan terms and changes in default rates also significantly affect the
Direct Loan program subsidy expense. For example, the Department modified the repayment
plans available to Direct Loan borrowers in FY 2015. The PAYE loan repayment option
available to eligible borrowers caps monthly payments for many recent graduates at an amount
that is affordable based on their income. PAYE, first announced in October 2011, caps
payments for direct loans at 10 percent of discretionary income for eligible borrowers. Borrowers
formerly ineligible for the more generous PAYE repayment plan are now eligible for a modified
version of PAYE that changed income-based repayment amounts on qualified loans from
15 percent of discretionary income to 10 percent. This modification increased subsidy expense
that resulted from lower expected loan repayments.
Direct Loan program re-estimated subsidy cost was adjusted upward by $21.8 billion in
FY 2016. The re-estimates reflect several updated assumptions: however, in this case, the size
of the net upward re-estimate was due largely to collection rates on defaulted loans and
repayment plan selection. Actual collections on defaults since FY 2011 were lower than
anticipated, which reduced estimated lifetime rates and increased the cost to the Department by
$10.1 billion. For repayment plan selection, a greater percentage of borrowers chose costlier
plans than had been estimated and increased the cost to the Department by $8.1 billion. The
percentage of borrowers choosing an income-driven repayment plan was the primary cost driver
for that assumption.
Analysis of Net Cost by Program
As required by the GPRA Modernization Act of 2010, each of the Department’s reporting groups
and major program offices have been aligned with the strategic goals presented in the
Department’s FY 2014–18 Strategic Plan. As further described in the performance section of the
Management’s Discussion & Analysis, Strategic Plan Goals 1–5 are sharply defined directives
that guide the Department’s program offices to carry out the vision and programmatic mission;
the net cost programs can be specifically associated with these five strategic goals. The
Department also has a cross-cutting Strategic Plan Goal 6, U.S. Department of Education
Capacity, which focuses on improving the organizational capacities of the Department to
implement the Strategic Plan. As a result, the Department does not assign specific programs to
Strategic Plan Goal 6 for presentation in the statement of net cost.
Net Cost Program Program Office Strategic Goal
Program A: Federal Student Aid Goal 1: Postsecondary Education, Career and
Increase College Technical Education, and Adult Education.
Access, Quality, and Office of Postsecondary Increase college access, affordability, quality, and
Completion Education completion by improving postsecondary education
and lifelong learning opportunities for youths and
Office of Career, Technical, adults.
and Adult Education
FY 2016 Agency Financial Report—U.S. Department of Education 25
MANAGEMENT’S DISCUSSION AND ANALYSIS
Net Cost Program Program Office Strategic Goal
Program B: Office of Elementary and Goal 2: Elementary and Secondary Education.
Improve Preparation for Secondary Education Improve the elementary and secondary education
College and Career system’s ability to consistently deliver excellent
from Birth Through 12th instruction aligned with rigorous academic standards
Grade, Especially for while providing effective support services to close
Children with High achievement and opportunity gaps, and ensure all
Needs students graduate high school college- and career-
ready.
Goal 3: Early Learning.
Improve the health, social-emotional, and cognitive
outcomes for all children from birth through 3rd
grade, so that all children, particularly those with high
needs, are on track for graduating from high school
college- and career-ready.
Program C: Office of English Language Goal 4: Equity.
Ensure Effective Acquisition Increase educational opportunities for underserved
Educational students and reduce discrimination so that all
Opportunities for All Office for Civil Rights students are well-positioned to succeed.
Students
Office of Special Education
and Rehabilitative Services
Program D: Institute of Education Sciences Goal 5: Continuous Improvement of the U.S.
Enhance the Education Education System.
System’s Ability to Office of Innovation and Enhance the education system’s ability to
Continuously Improve Improvement continuously improve through better and more
widespread use of data, research and evaluation,
evidence, transparency, innovation, and technology.
The Department has more than 100 grant and loan programs
(www.ed.gov/programs/inventory.html). In the statement of net cost, they have been mapped to
the applicable strategic goals. The Department’s FY 2016 expenditures for grant programs
totaled over $75 billion. The three largest grant programs are Title I, Pell, and the Individuals
with Disabilities Education Act grants. In addition to student loans and grants, the Department
offers other discretionary grants under a variety of authorizing legislation, awarded using a
competitive process and formula grants, using formulas determined by Congress with no
application process. The following table presents a breakdown of net cost by program for
FY 2016 and FY 2015.
26 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
The FY 2016 increase in net cost for Program A is primarily attributed to subsidy loan expenses.
FY 2016 Direct Loan program and FFEL program subsidy expense increased by $17 billion and
$14 billion, respectively, from FY 2015 subsidy expense amounts.
Statement of Changes in Net Position
The consolidated statement of changes in net position reports the beginning net position, the
summary effect of transactions that affect net position during the fiscal year, and the ending net
position. Net position consists of unexpended appropriations and cumulative results of
operations. Unexpended appropriations include undelivered orders and unobligated balances
for grant and administrative operations. Cumulative results of operations represent the net
difference since inception between (1) expenses and (2) revenues and financing sources. Net
position of the Department totaled $32.8 billion for the period ended September 30, 2016. This
reflects a 40 percent decrease over the net position of $54.8 billion from the prior fiscal year.
FY 2016 Agency Financial Report—U.S. Department of Education 27
MANAGEMENT’S DISCUSSION AND ANALYSIS
Statement of Budgetary Resources
The combined statement of budgetary resources presents information on how budgetary
resources were made available and their status at the end of the fiscal year. Information in this
statement is reported on the budgetary basis of accounting as prescribed by OMB and
Treasury.
The Department’s budgetary
resources totaled $335.0 billion for
the period ended September 30,
2016, decreasing from
$349.7 billion, or approximately
4.2 percent from the prior year.
Budgetary resources are comprised
of appropriated budgetary
resources of $103.2 billion and
non-budgetary credit reform
resources of $231.8 billion. The
non-budgetary credit reform
resources are predominantly
borrowing authority for the loan
programs.
Gross outlays of the
Department totaled
$285.2 billion for the
period ended
September 30, 2016,
and consisted of
appropriated budgetary
resources of
$88.4 billion and
non-budgetary credit
program funding of
$196.8 billion. Gross
outlays are primarily
comprised of credit
program loan
disbursements and
claim payments, credit
program subsidy interest payments to Treasury, and grant payments. Additional information on
the Department’s sources and uses of funds is shown in the schedule of spending on page 133.
This schedule includes sections titled, “What Money Is Available to Spend,” “How Was the
Money Spent,” and “Who Did the Money Go To.”
28 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
Limitations of the Financial Statements
Management has prepared the accompanying financial statements to report the financial
position and operational results for the U.S. Department of Education for FY 2016 and FY 2015,
pursuant to the requirements of Title 31 of the United States Code, section 3515(b).
While these statements have been prepared from the books and records of the Department in
accordance with generally accepted accounting principles for federal entities and the formats
prescribed by OMB, these statements are in addition to the financial reports used to monitor and
control budgetary resources, which are prepared from the same books and records.
The statements should be read with the realization that they are a component of the U.S.
government, a sovereign entity. The implications of this are that the liabilities presented herein
cannot be liquidated without the enactment of appropriations, and that ongoing operations are
subject to the enactment of future appropriations.
FY 2016 Agency Financial Report—U.S. Department of Education 29
MANAGEMENT’S DISCUSSION AND ANALYSIS
Introduction
Strong risk management practices and internal control help an entity run its operations
efficiently and effectively, report reliable information about its operations and financial position,
and comply with applicable laws and regulations. The FMFIA requires federal agencies to
establish internal controls that provide reasonable assurance that agency objectives will be
achieved. OMB Circular A-123, Management’s Responsibility for Enterprise Risk Management
and Internal Control implements FMFIA and defines management’s responsibilities for ERM and
internal control. The Circular provides guidance to federal managers to improve accountability
and effectiveness of federal programs as well as mission support operations through
implementation of ERM practices and by establishing, maintaining, and assessing internal
control effectiveness. The guidance requires federal agencies to provide reasonable assurance
that it has met the three objectives of internal controls:
 Operations—Effectiveness and efficiency of operations;
 Reporting—Reliability of reporting for internal and external use; and
 Compliance—Compliance with applicable laws and regulations.
This section describes the Department’s internal control framework, an analysis of the
effectiveness of its internal controls, and assurances provided by the Department’s leadership
that internal controls were in place and working as intended during FY 2016 to meet the three
objectives.
Control Framework and Analysis
As indicated in the performance management section above, the Department’s Strategic Plan,
including the six FY 2016–17 APGs, sets the foundation for determining the Department’s
mission goals and objectives. Underpinning the Department’s internal control framework are its
organizational structure, people, processes, policies and procedures, systems, controls, and
data.
Control Framework
The Department’s internal control framework helps to ensure that the Department achieves its
strategic goals and objectives related to delivering education services effectively and efficiently
while complying with all applicable laws and regulations and preparing accurate reports. This
includes providing reasonable assurance to Department leadership and external stakeholders
that financial data produced by the Department’s financial systems are complete, accurate, and
reliable enough to support the preparation and fair presentation of financial statements that
conform to federal standards, facilitate sound financial decision-making, and provide
transparency about how the Department spent federal funds and maintains stewardship over its
financial resources.
The Department maintains a comprehensive internal control framework and assurance process
as depicted in the following diagram.
FY 2016 Agency Financial Report—U.S. Department of Education 31
MANAGEMENT’S DISCUSSION AND ANALYSIS
Internal Control Framework and Assurance Process
The Office of the Chief Financial Officer (OCFO) manages the assurance process on behalf of
Department leadership. The Department established governance over the process, consisting of
a Senior Management Council, a Senior Assessment Team (SAT), and a Core Assessment
Team (CAT). The Senior Management Council is comprised of senior leaders from across the
Department who provide strategic direction and guidance to the SAT and CAT. The SAT and
CAT include representatives from OCFO, the Office of the Chief Information Officer (OCIO),
student loan and grant-making program offices, Risk Management Service, and other
32 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
operational support offices (including the Office of Management). The SAT and CAT provide
greater oversight and monitoring of activities related to internal control assessments.
The annual assurance process is the primary mechanism by which the Department implements
FMFIA and OMB requirements pertaining to internal control. It requires the head of each
principal office to evaluate its respective internal controls and to assert, in a letter to the Chief
Financial Officer, that it has reasonable assurance that key internal controls are in place and
working as intended or to provide a detailed description of significant deficiencies, material
weaknesses, and other matters of nonconformance. In making their assessment, principal office
staff consider information such as office managers’ personal knowledge of operations, external
audit results, internal assessments, and other related material.
OCFO staff work with the principal offices to help them identify potential control deficiencies and
consults with the SAT to determine whether they represent significant deficiencies or potential
material weaknesses. Any principal office that identifies a significant deficiency or material
weakness must prepare a Corrective Action Plan to address the issue. These Corrective Action
Plans, in addition to daily operational oversight and management-initiated evaluations, facilitate
the correction and monitoring of controls. If potential material weaknesses are identified, they
are evaluated by the Senior Management Council to determine if they should be reported on the
Department’s Statement of Assurance.
Analysis of Controls
Overall, the Department relies on the principal office annual assurances, supported by risk-
based internal control evaluations and testing, to provide reasonable assurance that its internal
controls are well designed and in place and working as intended. The Department also
considers issues identified by external auditors. During FY 2016, the Department revised its
annual assurance process to conform to the new requirements contained in the revised
U.S. Government Accountability Office publication, Standards for Internal Control in the Federal
Government (commonly referred to as the “Green Book”). Additionally, the Department
overhauled its entity-level assessment to reflect the updated Green Book.
In FY 2016, the Department identified no material control weaknesses related to effective and
efficient program operations and no areas of noncompliance with laws and regulations other
than those noted in the Internal Control Exceptions section below. Although no material
weaknesses were identified, the Department realizes that it has areas of control that need
further strengthening, such as those disclosed in this report and the major challenges identified
by the Department’s OIG in its OIG FY 2017 Management Challenges report. The Department
continues to demonstrate its commitment to addressing, mitigating, or resolving its identified
management challenges, at the level of root cause, to ultimately eradicate systemic and
persistent barriers to achieving its mission, and optimal performance.
In accordance with OMB Circular A-123, the Department also conducted an additional
assessment of the effectiveness of the Department’s internal controls over financial reporting
and compliance with key financial management laws and regulations as described below.
Internal Control over Financial Reporting
The Department maintains strong internal controls to identify, document, and assess internal
control over financial reporting, which includes:
FY 2016 Agency Financial Report—U.S. Department of Education 33
MANAGEMENT’S DISCUSSION AND ANALYSIS
 comprehensive process documentation for the Department’s significant business processes
and subprocesses,
 maintenance of a control catalogue composed of 1,716 key financial and operational
controls that align to the business processes6 (the Department monitors 312 key controls
and FSA monitors 1,404 key controls [243 entity-level controls, 850 servicer controls,
311 FSA controls]),
 technical assistance provided to principal offices to help them understand and assess key
financial controls,
 a risk-based testing strategy, and
 a process to develop corrective action plans when control deficiencies are found and to
track progress against those plans.
During FY 2016, the Department tested 150 key financial controls. Although some weaknesses
were detected in the design and effectiveness of controls, the Department did not identify any
material weaknesses. Corrective actions have been initiated for the deficiencies identified.
Furthermore, to ensure data accuracy and strengthen internal controls, the Department
migrated 20 of its manual reconciliations to an automated reconciliations platform. The
Department has undertaken a broader FM segment modernization plan and has identified
further manual reconciliations to be automated in the future.
Internal Control over Financial Management Systems
The FFMIA requires management to ensure that the Department’s financial management
systems consistently provide reliable data that comply with federal financial management
system requirements, applicable federal accounting standards, and the U.S. Standard General
Ledger at the transaction level. Appendix D to OMB Circular A-123, Compliance with the
Federal Financial Management Improvement Act of 1996, and OMB Circular A-130, Managing
Federal Information as a Strategic Resource, provide specific guidance to agency managers
when assessing conformance to FFMIA requirements.
The Department’s core financial systems are under the umbrella of the Education Central
Automated Processing System (EDCAPS), serving approximately 8,800 Departmental internal
users in Washington, D.C., and 10 regional offices throughout the United States, as well as
39,600 external users. EDCAPS is composed of five main linked components:
 Financial Management Support System (FMSS),
 Contracts and Purchasing Support System (CPSS),
 Grants Management System (G5),
 E2 Travel System, and
 Hyperion Budget Planning.
6 These figures include FSA.
34 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
The Department designated the FMSS as a mission-critical system that provides core financial
management services, and focused its system strategy on the following areas during FY 2016:
 managing and implementing cross-validation rules throughout the fiscal year to prevent
invalid accounting transactions from being processed,
 developing an interface solution with FSA to eliminate the manual collections processing of
funds returned to the Department for Perkins Loan Program,
 transmitting the Department’s spending data related to contracts, grants, loans, and other
financial assistance awards for the USASpending.gov initiative as part of the Federal
Funding Accountability and Transparency Act of 2006,
 meeting required timelines for a successful Digital Accountability and Transparency Act of
2014 (DATA Act) implementation, and
 establishing transaction assurance reports for validating the condition of data processed
through external interface files.
In FY 2017, EDCAPS will continue to provide customer service and improve security of its
systems by completing the Department’s compliance with Homeland Security Presidential
Directive (HSPD-12) user access requirements. The Department is also working to implement
interface enhancement between the Invoice Processing Platform and FMSS to automate the
receipt creation process, the Purchase Order balances and invoices matching process, and the
invoice approval process in FMSS.
FY 2016 Agency Financial Report—U.S. Department of Education 35
MANAGEMENT’S DISCUSSION AND ANALYSIS
The Department’s financial management systems are designed to support effective internal
control and produce accurate, reliable, and timely financial data and information. Based on self-
assessments, system-level general controls tests, and the results of external audits, the
Department has not identified any material weaknesses in controls over systems. The
Department has also determined that its financial management systems substantially comply
with FFMIA requirements. However, as noted below in the Internal Control Exceptions section,
the Department continues to address issues and improve its controls over systems.
Federal Information Security Modernization Act of 2014
The Federal Information Security Modernization Act of 2014 (FISMA) requires federal agencies
to develop, document, and implement an agencywide program to provide security for the
information and information systems that support the operations and assets of the agency and
ensure the confidentiality, integrity, and availability of system-related information.
The Department’s and FSA’s information security programs completed a number of significant
activities in FY 2016 to improve cybersecurity capabilities and functions, some of which
included:
 With the issuance by OMB of the federal government’s Cybersecurity Strategy and
Implementation Plan (CSIP), the Department focused many of its efforts in FY 2016 to
address the recommendations and actions highlighted in the CSIP in order to resolve any
cybersecurity gaps and emerging priorities that were noted across the government. The
CSIP required the Department to prioritize the identification and protection of high-value
information and assets. The Department completed this action, which will enable the
Department to better understand the potential impact from a cyber incident, and helps to
ensure that robust physical and cybersecurity protections are in place for our high-value
assets (HVAs).
 The Department continued to enhance the capabilities of the Department’s Security
Operations Centers (SOCs). The Department has fully deployed the Einstein capabilities in
order to enhance our ability to detect cyber vulnerabilities and protect against cyber threats.
The Department has also continued to strengthen its partnership with DHS for the project
planning that will accelerate the deployment of Continuous Diagnostics and Mitigation
(CDM) capabilities. This will further enhance capabilities that the Department initiated in
2016 to implement network access control (NAC) and data loss prevention (DLP) solutions.
The CDM solution will also enable the Department to enhance our configuration
management capabilities.
 The Department continued its progress of implementing and enforcing the use of multifactor
authentication for all federal employees, contractors, and other authorized users. The
Department and FSA focused on increasing the issuance of Personal Identity Verification
(PIV) and PIV-I two-factor authentication cards to privileged users to meet OMB
requirements.
 The Department made significant strides in its identification, tracking, and remediation of
unsupported software across the enterprise.
 The Department achieved all targets in the completion of required annual cybersecurity
training courses, and also successfully completed a number of phishing exercises. Of note,
100 percent of Department users completed the annual computer security and privacy
awareness training course. The Department strictly enforced compliance with annual
36 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
security and privacy awareness training requirements, and disabled network accounts for
noncompliant users.
 There has also been an increased Departmental focus on data security at institutions of
higher education (IHEs). FSA issued a new “Dear Colleague Letter” to IHEs that receive
financial aid stressing the need to comply with the Gramm-Leach-Bliley-Act (GLBA)
standards and announcing that these standards would now be included in future reviews to
be conducted by the Department. The Department recognizes that it is vital to focus on
cybersecurity at these IHEs as they connect to FSA systems and access FSA data. It is
noteworthy that the Department has successfully implemented two-factor authentication for
all external users of the G5 system, which is a customer-facing grants management system.
The Department has also engaged the General Services Administration to investigate the
use of Login.gov for two-factor authentication to other Department citizen-facing information
systems.
As a result of the Department implementing a comprehensive set of activities to strengthen the
overall cybersecurity of the Department’s networks, systems, and data, significant
improvements in its information security program were highlighted by the Department
completing actions to close 25 of the 26 recommendations to address the 16 findings made by
the OIG in its FY 2015 annual FISMA audit. For the FY 2016 annual FISMA audit, the OIG is
only reporting 15 recommendations to address 11 findings, which reflects a noteworthy drop in
the total number of findings and recommendations from the previous reporting year.
The OIG FISMA Audit objective was to conduct annual independent evaluations and tests to
determine the effectiveness of the information security program policies, procedures, and
practices of the Department. Unfortunately, the OIG was provided revised guidance in the last
week of the fiscal year for how to score and assess the effectiveness and maturity levels
achieved in each of the major parts of the Department’s information security program. This late
issuance of the guidance left the Department unable to prioritize or allot resources early in the
fiscal year to better address some of the specific criteria that were part of the new OIG scoring
methodology. The FY 2016 OIG FISMA reporting metrics are organized around the five security
functions outlined in the National Institute of Standards and Technology’s (NIST) Framework for
Improving Critical Infrastructure Cybersecurity (Cybersecurity Framework): Identify, Protect,
Detect, Respond, and Recover. The overall results of the OIG audit work for FY 2016
determined that the Department’s implementation of two of the five Cybersecurity Framework
security functions were assessed to be effective and were rated to be at the highest maturity
level. The two Department security functions that were determined to be effective are the
security elements of Identify and Recover. The OIG also assessed that the Department needed
to continue to make improvements in order to achieve effective maturity level ratings in the
Cybersecurity Framework security functions of Protect, Detect, and Respond.
The FY 2016 Financial Statement Audit report contained three new recommendations for the
Chief Information Officer’s attention:
 Ensure the update, review, approval, and dissemination of the Information
Assurance/Cybersecurity Policy and associated guidance is completed in order to comply
with NIST standards and OMB guidance;
 Design and implement controls over the handling of Department security and privacy
incidents to ensure their resolution is properly documented; and
FY 2016 Agency Financial Report—U.S. Department of Education 37
MANAGEMENT’S DISCUSSION AND ANALYSIS
 Strengthen and refine the process for holding system owners and information system
security officers accountable for remediation of control deficiencies and ensuring that the
appropriate security posture is maintained for Department and FSA information systems.
The following recommendations were noted as “Repeat Findings” in the audit report:
 Refine and fully implement FSA’s system security program to monitor compliance with NIST
requirements, in coordination with the Department’s organizationwide information security
program, at both the agency and system level;
 Strengthen and refine the process to ensure accountability for individuals responsible for
remediating the identified control deficiencies in the Department’s and FSA’s systems,
including cooperation between the Technology Office and Business Operations; and
 Strengthen and refine the process for holding contractors accountable for remediation of
control deficiencies in the Department’s and FSA’s systems.
The Department Chief Information Officer concurs with the recommendations and will be
developing the required corrective action plans to address them.
Internal Control over Payments
The Department’s FY 2016 Statement of Budgetary Resources reports $285 billion in total
outlays, consisting of appropriated budgetary resources of $88 billion and non-budgetary credit
program funding of $197 billion. The Department developed robust internal controls to ensure
payment integrity and to prevent, detect, and recover improper payments. Key controls related
to payment integrity include:
 preaward risk assessments,
 use of independent data sources (such as IRS data retrieval) to ensure accurate award
amounts,
 automated system controls to detect and prevent payment errors, and
 award and payment monitoring.
Additionally, the Department must rely on controls established by fund recipients who make
payments on behalf of the Department. These controls are outside of the Department’s
operational authority and present higher risks, as evidenced by the OIG work identifying
instances of questioned costs and restitution payments.
As described below, in FY 2016, the Department determined that its Pell Grant and Direct Loan
programs were susceptible to significant improper payments risk. A detailed description of the
Department’s controls over improper payments related to these two programs is presented in
the Other Information section of this report.
In addition, the Department launched Phase I of the Payment Integrity Workgroup in FY 2016 to
catalog internal controls around payment integrity to ensure proper payments. Starting in late
FY 2016, Phase II of the project is in process to further define and demonstrate payment
integrity. The workgroup plans to work collaboratively with process owners to validate internal
control measures, develop corrective action plans, address gaps, and ensure the accuracy of
the specific controls. The desired outcome of this effort is to minimize improper payments,
38 FY 2016 Agency Financial Report—U.S. Department of Education
MANAGEMENT’S DISCUSSION AND ANALYSIS
improve risk assessment and response, develop more efficiency in the process, and increase
positive assurance submissions.
Internal Control Exceptions
The Department identified two instances of noncompliance with laws and regulations in
FY 2016. Additionally, reviews and assessments conducted pursuant to information technology-
related laws and regulations identified challenges still facing the Department.
Improper Payments Information Act of 2002
The Improper Payments Information Act of 2002, Pub. L. 107-300, 116 Stat. 2350, as amended
by the Improper Payments Elimination and Recovery Act of 2010 (IPERA), Pub. L. 111-204, 124
Stat. 2224, and the Improper Payments Elimination and Recovery Improvement Act of 2012
(IPERIA), Pub. L. 112-248, 126 Stat. 2390, requires federal agencies to annually report
improper payments in programs susceptible to significant improper payments. IPERA also
requires agency Inspectors General to review agency improper payment reporting in the AFR
and accompanying materials, and to determine whether the agency has met six compliance
requirements.
OIG audits of the Department’s IPERA compliance for FY 2015 and FY 2014 found that the
Department was not compliant, because estimated improper payments for the Direct Loan
program those years did not meet the annual reduction target published in the prior year AFR.
The complete OIG reports are available for review at the OIG website. A detailed description of
the findings and corrective actions related to this issue of noncompliance is presented in the
Other Information section of this report.
We anticipate that the 2016 OIG audit will again find that, as of September 30, 2016, the
Department was not compliant with IPERA because the FY 2016 improper payment rates did
not meet the annual reduction targets for the Direct Loan or Pell Grant programs published last
year.
This determination of noncompliance with the IPERA does not represent a material weakness in
the Department’s internal controls.
Debt Collection Improvement Act of 1996
The Debt Collection Improvement Act of 1996 (DCIA), Pub. L. 104-134, 110 Stat. 1321-358,
was enacted into law as part of the Omnibus Consolidated Rescissions and Appropriations Act
of 1996, Pub. L. 104-134, 110 Stat. 1321. The primary purpose of the DCIA is to increase the
collection of nontax debts owed to the federal government. Additionally, the DATA Act, Pub. L.
113-101, 128 Stat. 1146, amended Section 3716(c)(6) of the DCIA to require referral of
delinquent debt to Treasury’s Offset Program within 120 days.
Due to unique program requirements of HEA, the Department requested guidance from
Treasury’s Bureau of Fiscal Service, Office of General Counsel for the application of this revised
DCIA requirement to Title IV debt. Treasury provided its interpretation of this requirement for
Title IV debt in July 2015. As of September 30, 2016, the Department and FSA were not in
compliance with the new 120-day referral requirement in 31 U.S.C. Section 3716(c)(6) because
FSA had not yet revised its loan servicing systems, procedures, and internal processes in
response to this interpretation. During FY 2016, FSA did identify policy changes required to
work towards achieving compliance. As of the end of FY 2016, FSA is vetting these policy
FY 2016 Agency Financial Report—U.S. Department of Education 39
MANAGEMENT’S DISCUSSION AND ANALYSIS
changes and expects to begin a multiple-year implementation in FY 2017. This area of
noncompliance is noted in the independent auditors’ report, exhibit B.
This determination of noncompliance with the DCIA does not represent a material weakness in
the Department’s internal controls.
40 FY 2016 Agency Financial Report—U.S. Department of Education
Financial Section
FINANCIAL SECTION
Message From the Chief Financial Officer
On behalf of the Department of Education, it is my privilege to
present to you our Fiscal Year (FY) 2016 Agency Financial Report
(AFR). I thank the Department’s leadership and staff for their
commitment to another successful fiscal year, and I hope that you
find the AFR a useful summary of the Department’s financial picture,
operating performance, and stewardship.
Both the short- and long-term economic impacts of the Department’s
mission to prepare students for college and to support attainment of
college degrees by those students are immense. At the heart of
U.S. global competitiveness are students whose creativity, innovative mindsets, and
entrepreneurial aspirations will sustain the American economy, as well as the U.S.
contribution to the challenges we face today and in the future. High quality, equitably
accessible, and affordable education for our country’s students is the foundation for our
future prosperity.
With approximately $1.2 trillion in total assets, comprised primarily of credit program
receivables that are funded by $1.1 trillion in Treasury borrowings, and $285.2 billion in total
annual spending supporting programs across the full education spectrum, effective controls
over financial activities are essential to responsibly delivering our mission outcomes.
Over the past eight years, the Department of Education experienced an unprecedented rate
of growth in our loan portfolio, primarily due to the Department’s assumption of direct
student loans. For example, credit program receivables increased from $234.3 billion in
FY 2009 to $1.1 trillion in FY 2016. During this time period, we also received two large
supplemental appropriations; $97.4 billion under the American Recovery and Reinvestment
Act of 2009 and $10 billion under the Education Jobs Fund.
I am proud of attaining our 15th consecutive unmodified or “clean” opinion of our financial
statements, the result of our dedicated cadre of financial professionals, their application of
effective controls, and a continuous improvement approach to promoting responsible
financial stewardship across all of the Department’s mission offices. With less than
1 percent of our $285.2 billion in payments each year applied to fund the Department’s
payroll, the achievement of clean opinions, as well as the receipt of our 12th award of the
prestigious Certificate of Excellence in Accountability Reporting by the Association of
Government Accountants, reflects the efforts of the Department’s highly productive team.
In addition to giving an unmodified opinion of our FY 2016 financial statements, our auditors
reported that we have no material controls weaknesses, nor material instances of
noncompliance with laws and regulations. As such, I can provide reasonable assurance
that the financial data included in this AFR are complete and reliable in accordance with
federal requirements. Although we have a strong internal control framework, we are
actively working to address the management challenges and other control and compliance
issues reported by our auditors and self-reported in various sections of this report.
Accountability, transparency, and stewardship are core values embraced by the
Department’s financial management professionals and their work underpins the mission
achievements described in this report that benefit all American students and families. As
we move into the future, we have four major priorities to sustain our core values—
upgrading our financial management and related business systems, to include migration to
42 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
MESSAGE FROM THE CHIEF FINANCIAL OFFICER
a shared service solution when feasible; enhancing data quality and our capacity to support
decision making through robust data analytics; incorporating enterprise risk management
practices into the culture of the Office of the Chief Financial Officer; and reshaping and
enhancing the competencies of our financial management workforce.
We look forward to implementing even stronger financial management practices in the
coming years to provide the American taxpayer with the best possible value for the
resources entrusted to us.
Tim Soltis
Delegated the Duties of Chief Financial Officer
November 14, 2016
FY 2016 Agency Financial Report—U.S. Department of Education 43
FINANCIAL SECTION
About the Financial Section
In FY 2016, the Department prepared its financial statements as a critical aspect of
ensuring accountability and stewardship for the public resources entrusted to it. Preparation
of these statements is an important part of the Department’s financial management goal of
providing accurate and reliable information for decision making.
The Department’s financial statements and additional information for FY 2016 and FY 2015
include the following. The Department welcomes comments from readers to further improve
the report. Comments can be e-mailed to AFRcomments@ed.gov.
The Consolidated Balance Sheet summarizes the assets, liabilities, and net position by
major category as of the reporting date. Intragovernmental assets and liabilities resulting
from transactions between federal agencies are presented separately from assets and
liabilities from transactions with the public. The Department revised the presentation of its
Consolidated Balance Sheet to emphasize the Department’s growing loan portfolio.
The Consolidated Statement of Net Cost shows, by strategic goal, the net cost of
operations for the reporting period. Net cost of operations consists of full program costs
incurred by the Department less exchange revenues earned by those programs.
The Consolidated Statement of Changes in Net Position presents the Department’s
beginning and ending net position by two components—Cumulative Results of Operations
and Unexpended Appropriations. It summarizes the change in net position by major
transaction category. The ending balances of both components of the net position are also
reported on the Consolidated Balance Sheet.
The Combined Statement of Budgetary Resources presents the budgetary resources
available to the Department, the status of these resources, and the outlays of budgetary
resources.
The Notes to the Financial Statements provides information to explain the basis of the
accounting and presentation used to prepare the statements and to explain specific items in
the statements. They also provide information to support how particular accounts have
been valued and computed. A list of each of the notes is presented below.
The Combining Statement of Budgetary Resources as Required Supplementary
Information presents budgetary resources by major program.
The Required Supplementary Stewardship Information provides disclosure of
investments in human capital and the related program outcomes resulting from stewardship
expense outlays.
Notes to the Financial Statements
Note 1. Summary of Significant Accounting Policies
Note 2. Non-Entity Assets
Note 3. Fund Balance with Treasury
Note 4. Other Assets
Note 5. Credit Programs for Higher Education: Credit Program Receivables, Net and
Liabilities for Loan Guarantees
Note 6. Liabilities Not Covered by Budgetary Resources
44 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
ABOUT THE FINANCIAL SECTION
Note 7. Debt
Note 8. Subsidy Due to Treasury General Fund
Note 9. Other Liabilities
Note 10. Intragovernmental Cost and Exchange Revenue by Program
Note 11. Credit Program Interest Expense and Interest Revenue
Note 12. Statement of Budgetary Resources
Note 13. Reconciliation of Net Cost of Operations to Budget
Note 14. Commitments and Contingencies
Required Supplementary Information
This section contains the Combining Statement of Budgetary Resources for the Periods
Ended September 30, 2016, and September 30, 2015.
Required Supplementary Stewardship Information
Stewardship Expenses summarize spending and stakeholder relationships with state and
local educational agencies. Stewardship resources are substantial investments by the
federal government for the long-term benefit of the nation. Because costs of stewardship
resources are treated as expenses in the financial statements in the year the costs are
incurred, they are reported as Required Supplementary Stewardship Information to
highlight the benefit nature of the costs and to demonstrate accountability.
Supplementing state and local government funding, the Department utilizes its annual
appropriations and outlay authority to foster human capital improvements across the nation
by supporting programs along the entire spectrum of “cradle to career” education.
Increased employability makes Americans more competitive in the global labor market,
yielding lower unemployment, higher economic well-being, and greater security for the
nation.
Report of the Independent Auditors
The results of the audit of the Department’s financial statements for FY 2016 and FY 2015
to comply with the Chief Financial Officers Act of 1990, as amended, are presented to be
read in conjunction with the Financial Section in its entirety. The Department’s Office of
Inspector General (OIG) contracted with the independent certified public accounting firm of
CliftonLarsonAllen LLP to audit the financial statements of the Department as of September
30, 2016 and 2015, and for the years then ended.
FY 2016 Agency Financial Report—U.S. Department of Education 45
FINANCIAL SECTION
FINANCIAL STATEMENTS
United States Department of Education
Consolidated Balance Sheet
As of September 30, 2016 and 2015
(Dollars in Millions)
FY 2016 FY 2015
Assets:
Intragovernmental:
Fund Balance with Treasury (Note 3) $ 96,763 $ 103,619
Other Intragovernmental Assets (Note 4) 102 78
Total Intragovernmental 96,865 103,697
Credit Program Receivables, Net (Note 5)
Direct Loan Program 958,881 880,557
FFEL Program 114,870 134,704
Other Credit Programs for Higher Education 2,828 2,472
Other Assets (Note 4) 1,363 1,689
Total Assets (Note 2) $ 1,174,807 $ 1,123,119
Liabilities:
Intragovernmental:
Debt (Note 7)
Direct Loan Program $ 994,285 $ 909,927
FFEL Program 131,347 139,771
Other Credit Programs for Higher Education 2,191 2,078
Subsidy Due to Treasury General Fund (Note 8) 2,642 8,237
Other Intragovernmental Liabilities (Note 9) 1,822 2,060
Total Intragovernmental 1,132,287 1,062,073
Other Liabilities (Note 9) 9,683 6,243
Total Liabilities (Note 6) $ 1,141,970 $ 1,068,316
Commitments and Contingencies (Note 14)
Net Position:
Unexpended Appropriations $ 61,052 $ 62,740
Cumulative Results of Operations (28,215) (7,937)
Total Net Position $ 32,837 $ 54,803
Total Liabilities and Net Position $ 1,174,807 $ 1,123,119
The accompanying notes are an integral part of these statements.
46 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
FINANCIAL STATEMENTS
United States Department of Education
Consolidated Statement of Net Cost
For the Years Ended September 30, 2016 and 2015
(Dollars in Millions)
FY 2016 FY 2015
Program Costs:
Increase College Access, Quality, and Completion
Gross Costs $ 97,314 $ 63,697
Earned Revenue (34,316) (31,600)
Net Program Costs $ 62,998 $ 32,097
Improve Preparation for College and Career from Birth
Through 12th Grade, Especially for Children with High Needs
Gross Costs $ 22,363 $ 22,350
Earned Revenue (16) (20)
Net Program Costs $ 22,347 $ 22,330
Ensure Effective Educational Opportunities for All Students
Gross Costs $ 16,925 $ 16,656
Earned Revenue (11) (11)
Net Program Costs $ 16,914 $ 16,645
Enhance the Education System’s Ability to Continuously Improve
Gross Costs $ 2,121 $ 2,412
Earned Revenue (58) (59)
Net Program Costs $ 2,063 $ 2,353
Net Cost of Operations (Notes 10 & 13) $ 104,322 $ 73,425
The accompanying notes are an integral part of these statements.
FY 2016 Agency Financial Report—U.S. Department of Education 47
FINANCIAL SECTION
FINANCIAL STATEMENTS
United States Department of Education
Consolidated Statement of Changes in Net Position
For the Years Ended September 30, 2016 and 2015
(Dollars in Millions)
FY 2016 FY 2015
Cumulative Cumulative
Results of Unexpended Results of Unexpended
Operations Appropriations Operations Appropriations
Beginning Balances:
Beginning Balances $ (7,937) $ 62,740 $ (23,741) $ 66,447
Budgetary Financing Sources:
Appropriations Received $ - $ 88,210 $ - $ 100,955
Appropriations Transferred – In/Out - - - (397)
Other Adjustments (Rescissions, etc.) - (821) - (783)
Appropriations Used 89,077 (89,077) 103,482 (103,482)
Nonexchange Revenue 9 - 8 -
Donations and Forfeitures of Cash and
Cash Equivalents 1 - 2 -
Other Financing Sources:
Imputed Financing from Costs Absorbed by Others 81 - 30 -
Negative Subsidy Transfers, Downward Subsidy
Re-Estimates, and Other (5,124) - (14,293) -
Total Financing Sources $ 84,044 $ (1,688) $ 89,229 $ (3,707)
Net Cost of Operations: $ (104,322) $ - $ (73,425) $ -
Net Change: $ (20,278) $ (1,688) $ 15,804 $ (3,707)
Net Position $ (28,215) $ 61,052 $ (7,937) $ 62,740
The accompanying notes are an integral part of these statements.
48 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
FINANCIAL STATEMENTS
United States Department of Education
Combined Statement of Budgetary Resources
For the Years Ended September 30, 2016 and 2015
(Dollars in Millions)
FY 2016 FY 2015
Non- Non-
Budgetary Budgetary
Credit Reform Credit Reform
Financing Financing
Budgetary Accounts Budgetary Accounts
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1 $ 14,774 $ 14,437 $ 14,837 $ 10,109
Recoveries of Prior Year Unpaid Obligations 746 21,047 1,978 20,727
Other Changes in Unobligated Balance (+ or -) (772) (24,695) (679) (23,984)
Unobligated Balance from Prior Year Budget Authority, Net $ 14,748 $ 10,789 $ 16,136 $ 6,852
Appropriations (Discretionary and Mandatory) 87,924 24 100,701 904
Borrowing Authority (Discretionary and Mandatory) (Note 12) - 167,400 - 171,807
Spending Authority from Offsetting Collections
(Discretionary and Mandatory) 522 53,608 381 52,897
Total Budgetary Resources $ 103,194 $ 231,821 $ 117,218 $ 232,460
Status of Budgetary Resources:
New Obligations Incurred and Upward Adjustments (Total) (Note 12) $ 90,802 $ 216,342 $ 102,444 $ 218,023
Unobligated Balance, End of Year:
Apportioned, Unexpired Accounts 10,280 - 11,806 550
Unapportioned, Unexpired Accounts 1,212 15,479 1,771 13,887
Unexpired Unobligated Balance, End of year $ 11,492 $ 15,479 $ 13,577 $ 14,437
Expired Unobligated Balance, End of Year 900 - 1,197 -
Unobligated Balance, End of Year (Total) $ 12,392 $ 15,479 $ 14,774 $ 14,437
Total Status of Budgetary Resources $ 103,194 $ 231,821 $ 117,218 $ 232,460
Change in Obligated Balance:
Unpaid Obligations
Unpaid Obligations, Brought Forward, October 1 $ 52,645 $ 78,116 $ 56,219 $ 80,316
New Obligations and Upward Adjustments 90,802 216,342 102,444 218,023
Outlays (Gross) (-) (88,452) (196,787) (103,847) (199,496)
Actual Transfers, Unpaid Obligations (Net) (+ or -) - - (193) -
Recoveries of Prior Year Unpaid Obligations (-) (746) (21,047) (1,978) (20,727)
Unpaid Obligations, End of Year $ 54,249 $ 76,624 $ 52,645 $ 78,116
Uncollected Payments
Uncollected Payments, Federal Sources, Brought Forward, October
1 (-) $ (3) $ (26) $ (1) $ (26)
Change in Uncollected Payments, Federal Sources (+ or -) 1 22 (2) -
Uncollected Payments, Federal Sources, End of Year (-) $ (2) $ (4) $ (3) $ (26)
Memorandum (Non-add) Entries
Obligated Balance, Start of Year (+ or -) $ 52,642 $ 78,090 $ 56,218 $ 80,290
Obligated Balance, End of Year (+ or -) $ 54,247 $ 76,620 $ 52,642 $ 78,090
Budget Authority and Outlays, Net:
Budget Authority, Gross (Discretionary and Mandatory) $ 88,446 $ 221,032 $ 101,082 $ 225,608
Actual Offsetting Collections (Discretionary and Mandatory) (-) (721) (114,123) (713) (122,387)
Change in Uncollected Customer Payments from Federal Sources
(Discretionary and Mandatory) (+ or -) 1 22 (2) -
Recoveries of Prior Year Paid Obligations (Discretionary and
Mandatory) (1) (516) (2) (542)
Budget Authority, Net (Discretionary and Mandatory) $ 87,725 $ 106,415 $ 100,365 $ 102,679
Outlays, Gross (Discretionary and Mandatory) $ 88,452 $ 196,787 $ 103,847 $ 199,496
Actual Offsetting Collections (Discretionary and Mandatory) (-) (721) (114,123) (713) (122,387)
Outlays, Net (Discretionary and Mandatory) 87,731 82,664 103,134 77,109
Distributed Offsetting Receipts (-) (Note 12) (10,766) - (13,105) -
Agency Outlays, Net (Discretionary and Mandatory) (Note 12) $ 76,965 $ 82,664 $ 90,029 $ 77,109
The accompanying notes are an integral part of these statements.
FY 2016 Agency Financial Report—U.S. Department of Education 49
FINANCIAL DETAILS
Notes to the Financial Statements
For the Years Ended September 30, 2016 and 2015
Note 1. Summary of Significant Accounting Policies
Reporting Entity and Programs
The U.S. Department of Education (the Department), a cabinet-level agency of the executive
branch of the U.S. government, was established by Congress under the Department of
Education Organization Act (Public Law 96-88), which became effective on May 4, 1980. The
mission of the Department is to promote student achievement and preparation for global
competitiveness by fostering educational excellence and ensuring equal access. The
Department engages in four major types of activities: establishing policies related to federal
educational funding, including the distribution of funds, collecting on student loans, and using
data to monitor the use of funds; supporting data collection and research on America’s schools;
identifying major issues in education and focusing national attention on them; and enforcing
federal laws prohibiting discrimination in programs that receive federal funds.
The Department is primarily responsible for administering federal student loan and grant
programs and provides technical assistance to loan and grant recipients and other state and
local partners. The significant portion of the financial activities of the Department relate to the
execution of grant and loan programs which are discussed below.
Federal Student Loan Programs. The Department administers direct loan, loan guarantee
and other student aid programs to help students and their families finance the cost of
postsecondary education. These include the William D. Ford Federal Direct Loan (Direct Loan)
program and the Federal Family Education Loan (FFEL) program.
The Direct Loan program, added to the Higher Education Act of 1965 (HEA) in 1993 by the
Student Loan Reform Act of 1993, authorizes the Department to make loans through
participating schools to eligible undergraduate and graduate students and their parents. The
FFEL program, authorized by the HEA, operates through state and private nonprofit guaranty
agencies which provided loan guarantees on loans made by private lenders to eligible
students. The SAFRA Act, which was included in the Health Care and Education Reconciliation
Act of 2010 (HCERA), stated that no new FFEL loans would be made effective July 1, 2010.
The Department also administers loans for the Historically Black Colleges and Universities
(HBCU) Capital Financing program, the Health Education Assistance Loan (HEAL) program,
and the Teacher Education Assistance for College and Higher Education Grant (TEACH)
program, along with low-interest loans to institutions of higher education for the building and
renovating of their facilities through the facilities loan programs.
Grant Programs. The Department has more than 100 grant and loan programs. The three
largest grant programs are Title I, Federal Pell Grant (Pell Grant), and the Individuals with
Disabilities Education Act (IDEA) grants. In addition to student loans and grants, the
Department offers other discretionary grants under a variety of authorizing legislation, awarded
using a competitive process, and formula grants, using formulas determined by Congress with
no application process.
The Department has three major program offices that administer most of its loan and grant
programs.
 Federal Student Aid (FSA) administers need-based financial assistance programs for
students pursuing postsecondary education and makes available federal grants, direct
loans, and work-study funding to eligible undergraduate and graduate students.
50 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
 The Office of Elementary and Secondary Education (OESE) assists state and local
educational agencies to improve the achievement of preschool, elementary, and secondary
school students, helps ensure equal access to services leading to such improvement—
particularly children with high needs, and provides financial assistance to local educational
agencies whose local revenues are affected by federal activities.
 The Office of Special Education and Rehabilitative Services (OSERS) supports programs
that help provide early intervention and special education services to children and youth
with disabilities. OSERS also supports programs for the vocational rehabilitation of youth
and adults with disabilities, including pre-employment transition services and other
transition services designed to assist students with disabilities to enter postsecondary
education and achieve employment.
Other offices that administer programs and provide leadership, technical assistance, and
financial support to state and local educational activities and institutions of higher education for
reform, strategic investment, and innovation in education include: the Office of Career,
Technical, and Adult Education (OCTAE); Office of Postsecondary Education (OPE); Institute
of Education Sciences (IES); Office of English Language Acquisition (OELA); and Office of
Innovation and Improvement (OII). In addition, the Office for Civil Rights (OCR) works to ensure
equal access to education, promotes educational excellence throughout the nation, and serves
student populations facing discrimination and the advocates and institutions promoting
systemic solutions to civil rights issues. (See Note 10)
Basis of Accounting and Presentation
These financial statements have been prepared to report the financial position, net cost of
operations, changes in net position, and budgetary resources of the Department, as required
by the Chief Financial Officers Act of 1990 and the Government Management Reform Act of
1994. The financial statements were prepared from the books and records of the Department,
in accordance with Generally Accepted Accounting Principles (GAAP) accepted in the U.S. for
federal entities, issued by the Federal Accounting Standards Advisory Board (FASAB), and the
Office of Management and Budget (OMB) Circular A-136, Financial Reporting Requirements,
as revised. These financial statements are different from the financial reports prepared by the
Department pursuant to OMB directives that are used to monitor and control the use of
budgetary resources. FSA also issues audited stand-alone financial statements which are
included in their annual report.
The Department’s financial statements should be read as a component of the U.S. government,
a sovereign entity. One of the many implications of this is that the liabilities cannot be liquidated
without legislation providing resources and legal authority to do so.
The accounting structure of federal agencies is designed to reflect both accrual and budgetary
accounting transactions. Under the accrual method of accounting, revenues are recognized
when earned and expenses are recognized when a liability is incurred, without regard to receipt
or payment of cash. Budgetary accounting facilitates compliance with legal constraints and
controls over the use of federal funds.
Intradepartmental transactions and balances have been eliminated from the consolidated
financial statements.
The Department’s financial activities are interlinked and dependent upon the financial activities
of the centralized management functions of the federal government. Due to financial regulation
and management control by OMB and the U.S. Department of Treasury (Treasury), operations
may not be conducted and financial positions may not be reported as they would if the
Department were a separate, unrelated entity.
FY 2016 Agency Financial Report—U.S. Department of Education 51
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Accounting for Federal Credit Programs
The purpose of the Federal Credit Reform Act of 1990 (FCRA) is to record the lifetime subsidy
cost of direct loans and loan guarantees at the time the loan is disbursed. Components of
subsidy costs for loans and guarantees include defaults (net of recoveries); contractual
payments to third-party private loan collectors who receive a set percentage of amounts
collected; and, as an offset, origination and other fees collected. For direct loans, the difference
between interest rates incurred by the Department on its borrowings from Treasury and interest
rates charged to particular borrowers is also subsidized (or may provide an offset to subsidy if
the Department’s rate is less).
Under the FCRA, subsidy cost is estimated using the net present value of future cash flows to
and from the Department. In accordance with the FCRA, credit programs either estimate a
subsidy cost to the government (a “positive” subsidy), breakeven (zero subsidy cost), or
estimate a negative subsidy cost. Negative subsidy occurs when the estimated cost of
providing loans to borrowers from Treasury borrowing, collection costs, and loan forgiveness is
less than the value of collections from borrowers for interest and fees, in present value terms.
The subsidy costs of direct loan and loan guarantee programs are budgeted and tracked by the
fiscal year in which the loan award is made or the funds committed. Such a grouping of loans
or guarantees is referred to as a “cohort.” A cohort is a grouping of direct loans obligated or
loan guarantees committed by a program in the same year even if disbursements occur in
subsequent years.
In order to account for the change in the net present value of the loan portfolio over time, the
subsidy cost is “amortized” each year. Amortization of subsidy is interest expense on debt with
Treasury minus interest income from borrowers and interest on uninvested fund balance with
Treasury. It is calculated as the difference between interest revenue and interest expense.
Amortization accounts for the differences in interest rates, accruals, and cash flows over the life
of a cohort, ensuring that cost is reflected in subsidy estimates and re-estimates.
The FCRA establishes the use of financing, program, and Treasury General Fund receipt
accounts for loan guarantees committed and direct loans obligated after September 30, 1991.
 Financing accounts borrow funds from Treasury, make direct loan disbursements, collect
fees from lenders and borrowers, pay claims on guaranteed loans, collect principal and
interest from borrowers, earn interest from Treasury on any uninvested funds, and transfer
excess subsidy to Treasury General Fund receipt accounts. Financing accounts are
presented separately in the combined statement of budgetary resources (SBR) as non-
budgetary credit reform accounts to allow for a clear distinction from all other budgetary
accounts. This facilitates reconciliation of the SBR to the Budget of the United States
Government (President’s Budget).
 Program accounts receive and obligate appropriations to cover the positive subsidy cost of
a direct loan or loan guarantee when the loan is approved and disburses the subsidy cost to
the financing account when the loan is issued. Program accounts also receive
appropriations for administrative expenses.
 Treasury General Fund receipt accounts receive amounts paid from financing accounts
when there are negative subsidies for new loan disbursements or downward re-estimates of
existing loans.
52 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Budgetary Resources
Budgetary resources are amounts available to enter into new obligations and to liquidate them.
The Department’s budgetary resources include unobligated balances of resources from prior
years; recoveries of prior-year obligations; and new resources, which include appropriations,
authority to borrow from Treasury, and spending authority from collections.
Borrowing authority is an indefinite budgetary resource authorized under the FCRA. This
resource, when realized, finances the unsubsidized portion of the Direct Loan, FFEL, and other
loan programs. In addition, borrowing authority is requested to cover the cost of the initial loan
disbursement as well as any related negative subsidy to be transferred to Treasury General
Fund receipt accounts. Treasury prescribes the terms and conditions of borrowing authority
and lends to the financing account amounts as appropriate. Amounts borrowed, but not yet
disbursed, are included in uninvested funds and earn interest. Treasury uses the same
weighted average interest rates for both the interest charged on borrowed funds and the
interest earned on uninvested funds. Treasury sets a different fixed interest rate to be used for
each loan cohort once the loans are substantially disbursed. The Department may carry
forward borrowing authority to future fiscal years provided that cohorts are disbursing loans. All
borrowings from Treasury are effective on October 1 of the current fiscal year, regardless of
when the Department borrowed the funds, except for amounts borrowed to make annual
interest payments.
Authority to borrow from Treasury provides most of the funding for disbursements made under
the Direct Loan, FFEL, and other loan programs. Subsidy and administrative costs of the
programs are funded by appropriations. Borrowings are repaid using collections from
borrowers, fees and interest on uninvested funds.
Unobligated balances represent the cumulative amount of budgetary resources that are not
obligated and that remain available for obligation under law, unless otherwise restricted.
Resources expiring at the end of the fiscal year remain available for five years, but only for
upward adjustments of prior year obligations, after which they are canceled and may not be
used. Resources that have not expired at year-end are available for new obligations, as well as
upward adjustments of prior-year obligations. Funds are appropriated on an annual, multiyear,
or no-year basis. Appropriated funds shall expire on the last day of availability and are no
longer available for new obligations. Amounts in expired funds are unavailable for new
obligations, but may be used to adjust previously established obligations.
Permanent Indefinite Budget Authority. The Direct Loan, FFEL, and other loan programs
have permanent indefinite budget authority through legislation to fund subsequent increases to
the estimated future costs of the loan programs. Parts B and D of the HEA pertain to the
existence, purpose, and availability of permanent indefinite budget authority for these
programs.
Reauthorization of Legislation. Funds for most Department programs are authorized, by
statute, to be appropriated for a specified number of years, with an automatic one-year
extension available under Section 422 of the General Education Provisions Act. Congress may
continue to appropriate funds after the expiration of the statutory authorization period,
effectively reauthorizing the program through the appropriations process. The current Budget of
the United States Government presumes all programs continue in accordance with
congressional budgeting rules. (See Note 12)
Use of Estimates
Department management is required to make certain estimates while preparing consolidated
financial statements in conformity with GAAP. These estimates are reflected in the assets,
liabilities, net cost, and net position of the financial statements and may differ from actual
results. The Department’s estimates are based on management’s best knowledge of current
FY 2016 Agency Financial Report—U.S. Department of Education 53
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
events, historical experiences, and other assumptions that are believed to be reasonable under
the circumstances. Significant estimates reported on the financial statements include: allocation
of Department administrative overhead costs; allowance for subsidy for direct, defaulted
guaranteed, and acquired loans; the liability for loan guarantees; the amount payable or
receivable from annual credit program re-estimates and modifications of subsidy cost (general
program administration cost); and grant liability and advance accruals. (See Notes 4, 5, 9, and
10)
Entity and Non-Entity Assets
Assets are classified as either entity or non-entity assets. Entity assets are those that the
Department has authority to use for its operations. Non-entity assets are those held by the
Department but not available for use in its operations. Non-entity assets are offset by liabilities
to third parties and have no impact on net position. The Department combines its entity and
non-entity assets on the balance sheet and discloses its non-entity assets in the notes. (See
Note 2)
Fund Balance with Treasury
Fund Balance with Treasury includes five types of funds in the Department’s accounts with
Treasury available to pay current liabilities and finance authorized purchases, as well as funds
restricted until future appropriations are received: (1) general funds, which consist of
expenditure accounts used to record financial transactions funded by congressional
appropriations (which include amounts appropriated to fund subsidy and administrative costs of
loan programs); (2) revolving funds, which manage the activity of self-funding programs
whether through fees, sales, or other income (which include financing accounts for loan
programs); (3) special funds, which collect funds from sources that are authorized by law for a
specific purpose—these receipts are available for expenditure for special programs; (4) trust
funds are used for the acceptance and administration of funds contributed from public and
private sources and programs and are in cooperation with other federal and state agencies or
private donors; and (5) other funds include deposit funds, agency receipt funds, and clearing
accounts. Treasury processes cash receipts and cash disbursements for the Department. The
Department’s records are reconciled with Treasury’s. (See Note 3)
Accounts Receivable
Accounts receivable are amounts due to the Department from the public and other federal
agencies. Receivables from the public result from overpayments to recipients of grants and
other financial assistance programs, as well as disputed costs resulting from audits of
educational assistance programs. Amounts due from federal agencies result from reimbursable
agreements entered into by the Department with other agencies to provide various goods and
services. Accounts receivable are reduced to net realizable value by an allowance for
uncollectible amounts. The estimate of an allowance for loss on uncollectible accounts is based
on the Department’s experience in the collection of receivables and an analysis of the
outstanding balances. (See Note 4)
Guaranty Agencies’ Federal Funds
Guaranty agencies’ federal funds, which consist of Cash and Other Monetary Assets, are
primarily comprised of the federal government’s interest in the program assets held by state
and nonprofit FFEL program guaranty agencies. Section 422A of the HEA required FFEL
guaranty agencies to establish federal student loan reserve funds (federal funds). Federal
funds include initial federal start-up funds, receipts of federal reinsurance payments, insurance
premiums, guaranty agency share of collections on defaulted loans, investment income,
administrative cost allowances, and other assets.
54 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
The balance in the Federal Fund represents consolidated reserve balances of the 27 guaranty
agencies based on the Guaranty Agency Financial Reports that each agency submits annually
to the Department. Although the Department and the guaranty agencies operate on different
fiscal years, all guaranty agencies are subject to an annual audit based on form of organization.
A year-end valuation adjustment is made to adjust the Department’s balances in order to
comply with federal accounting principles and disclose funds held outside of Treasury.
Guaranty agencies’ federal funds are classified as non-entity assets with the public and are
offset by a corresponding liability due to Treasury. The federal funds are held by the guaranty
agencies but can only be used for certain specific purposes listed in the Department’s
regulations. The federal funds are the property of the U.S. and are reflected in the Budget of
the United States Government. Payments made to the Department from guaranty agencies’
federal funds through a statutory recall or agency closures represent capital transfers and are
credited to the Department’s Fund Balance with Treasury account. (See Notes 2, 4, and 9)
Credit Program Receivables, Net and Liabilities for Loan Guarantees
The financial statements reflect the Department’s estimate of the long-term subsidy cost of
direct and guaranteed loans in accordance with the FCRA. Loans and interest receivable are
valued at their gross amounts less an allowance for the present value of amounts not expected
to be recovered and thus having to be subsidized—called an “allowance for subsidy.” The
difference between the gross amount and the allowance for subsidy is the present value of the
cash flows to, and from, the Department that are expected from receivables over their projected
lives. Similarly, liabilities for loan guarantees are valued at the present value of the cash
outflows from the Department less the present value of related inflows. The estimated present
value of net long-term cash outflows of the Department for subsidized costs is net of
recoveries, interest supplements, and offsetting fees. The Department also values all pre-1992
loans, loan guarantees, and direct loans at their net present values. If the liability for loan
guarantees is positive, the amount is reported as a component of credit program receivables,
net.
The liability for loan guarantees presents the net present value of all future cash flows from
currently insured FFEL loans, including claim payments, interest assistance, allowance
payments, and recoveries from assigned loans. Guaranteed loans that default are initially
turned over to guaranty agencies for collection. Defaulted FFEL loans are accounted for and
reported in the financial statements under credit reform rules, similar to direct loans, although
they are legally not direct student loans. Negative balances are reported as a component of
credit program receivables, net. Credit program receivables, net includes defaulted FFEL loans
owned by the Department and held by the Department or guaranty agencies. In most cases,
after approximately four years, defaulted guaranteed loans not in repayment are turned over to
the Department for collection.
FFEL program receivables include purchased loans and other interests acquired under an
expired program. The cash flows related to these receivables include collections on purchased
loans and other activities, including transfers of re-estimated subsidy. The cash flows of these
authorities also include inflows and outflows associated with the underlying or purchased loans
and other related activities, including any positive or negative subsidy transfers. (See Note 5)
FY 2016 Agency Financial Report—U.S. Department of Education 55
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Property and Equipment, Net and Leases
The Department has very limited acquisition costs associated with buildings, furniture and
equipment as all Department and contractor staff are housed in leased buildings. The
Department does not own real property for the use of its staff. The Department leases office
space from the General Services Administration (GSA). The lease contracts with GSA for
privately and publicly owned buildings are operating leases.
The Department also leases information technology and telecommunications equipment, as
part of a contractor-owned, contractor-operated services contract. Lease payments associated
with this equipment have been determined to be operating leases and, as such, are expensed
as incurred. The noncancellable lease term is one year, with the Department holding the right
to extend the lease term by exercising additional one-year options. (See Notes 4 and 14)
Liabilities
Liabilities represent actual and estimated amounts to be paid as a result of transactions or
events that have already occurred. However, no liabilities can be paid by the Department
without budget authority. Liabilities for which an appropriation has not been enacted are
classified as liabilities not covered by budgetary resources, and there is no certainty that an
appropriation will be enacted. The government, acting in its sovereign capacity, can abrogate
liabilities that arise from activities other than contracts. FFEL program and Direct Loan program
liabilities are entitlements covered by permanent indefinite budget authority. (See Note 6)
Accounts Payable
Accounts payable include amounts owed by the Department for goods and services received
from other entities, as well as payments not yet processed. Accounts payable to the public
primarily consists of in-process grant and loan disbursements, including an accrued liability for
schools that have disbursed loans prior to requesting funds. (See Note 9)
Debt
The Department borrows from Treasury to provide funding for the Direct Loan, FFEL, and other
credit programs for higher education. The liability to Treasury from borrowings represents
unpaid principal at year-end. The Department repays the principal based on available fund
balances. Interest rates are based on the corresponding rate for 10-year Treasury securities
and are set for those borrowings supporting each cohort of loans once the loans for that cohort
are substantially disbursed. Interest is paid to Treasury at September 30. In addition, the
Federal Financing Bank (FFB) holds bonds issued by a designated bonding authority, on behalf
of the Department, for the HBCU Capital Financing program. The debt for other credit
programs for higher education includes the liability for full payment of principal and accrued
interest for the FFB-financed HBCU Capital Financing program. (See Note 7)
Net Cost
Net cost consists of gross costs and earned revenue. Gross costs and earned revenue are
classified as intragovernmental (exchange transactions between the Department and other
entities within the federal government) or with the public (exchange transactions between the
Department and nonfederal entities).
Net program costs are gross costs less revenue earned from activities. The Department
determines gross cost and earned revenue by tracing amounts back to the specific program
office. Administrative overhead costs of funds unassigned are allocated based on full-time
employee equivalents of each program. (See Note 10)
56 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Credit Program Interest Expense and Interest Revenue
The Department accrues interest receivable and records interest revenue on performing direct
loans and FFEL loans purchased by the Department. The Department recognizes interest
income when interest is accrued on loans to the public for the Direct Loan, FFEL, and other
loan programs. FFEL financing and liquidating accounts accrue interest as part of allowance for
subsidy. Interest due from borrowers is accrued at least monthly and is satisfied upon collection
or capitalization into the loan principal. Federal interest revenue is recognized on fund balance
with Treasury for the Direct Loan, FFEL, and other loan programs.
Federal interest expense is recognized on the outstanding borrowing from Treasury (debt) used
to finance loans. The interest rate for federal interest expense is the same as the rate used for
federal interest revenue.
Interest expense and interest revenue are equal for all credit programs due to subsidy
amortization. Subsidy amortization is required by the FCRA and accounts for the difference
between interest accruals and interest cash flows. For direct loans, the allowance for subsidy is
adjusted with the offset to interest revenue. For guaranteed loans, the liability for loan
guarantees is adjusted with the offset to interest expense. (See Note 11)
Net Position
Net position consists of unexpended appropriations and cumulative results of operations.
Unexpended appropriations include undelivered orders and unobligated balances, except for
amounts in financing accounts, liquidating accounts, and trust funds. Cumulative results of
operations represent the net difference since inception between (1) expenses and (2) revenues
and financing sources.
Personnel Compensation and Other Employee Benefits
Annual, Sick, and Other Leave. The liability for annual leave, compensatory time off, and
other vested leave is accrued when earned and reduced when taken. Each year, the accrued
annual leave account balance is adjusted to reflect current pay rates. Sick leave and other
types of nonvested leave are expensed as taken. Annual leave earned but not taken, within
established limits, is funded from future financing sources.
Retirement Plans and Other Retirement Benefits. Employees participate in either the Civil
Service Retirement System (CSRS), a defined benefit plan, or the Federal Employees
Retirement System (FERS), a defined benefit and contribution plan. For CSRS employees, the
Department contributes a fixed percentage of pay.
FERS consists of Social Security, a basic annuity plan, and the Thrift Savings Plan. The
Department and the employee contribute to Social Security and the basic annuity plan at rates
prescribed by law. In addition, the Department is required to contribute to the Thrift Savings
Plan a minimum of 1 percent per year of the basic pay of employees covered by this system,
match voluntary employee contributions up to 3 percent of the employee’s basic pay, and
match one-half of contributions between 3 percent and 5 percent of the employee’s basic pay.
For FERS employees, the Department also contributes the employer’s share of Medicare.
Contributions for CSRS, FERS, and other retirement benefits are insufficient to fund the
programs fully and are subsidized by the Office of Personnel Management (OPM). The
Department imputes its share of the OPM subsidy, using cost factors provided by OPM, and
reports the full cost of the programs related to its employees.
Federal Employees’ Compensation Act. The Federal Employees’ Compensation Act (FECA)
provides income and medical cost protection to covered federal civilian employees injured on
the job, employees who have incurred work-related occupational diseases, and beneficiaries of
employees whose deaths are attributable to job-related injuries or occupational diseases. The
FY 2016 Agency Financial Report—U.S. Department of Education 57
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
FECA program is administered by the U.S. Department of Labor (DOL), which pays valid
claims and subsequently seeks reimbursement from the Department for these paid claims.
The FECA liability consists of two components. The first component is based on actual claims
paid and recognized by the Department as a liability. Generally, the Department reimburses
DOL within two to three years once funds are appropriated. The second component is the
estimated liability for future benefit payments based on unforeseen events, such as death,
disability, medical, and miscellaneous costs as determined by DOL annually. (See Notes 6 and
9)
Reclassifications
Certain reclassifications were made to the prior year financial statements and notes to conform
to the current year presentation. These changes had no effect on total assets, liabilities and net
position, net cost of operations, or budgetary resources. Changes made to the balance sheet
provide additional information related to credit program receivables and related liability
balances, and immaterial balances were aggregated and consolidated into other lines.
Components of the prior year Direct Loan subsidy transfers were reclassified in Note 5 to better
reflect the fiscal year of underlying loan disbursement versus actual subsidy disbursement; the
total FY 2015 Direct Loan subsidy transfers was not affected. Additionally, changes were made
to the Statement of Budgetary Resources in accordance with OMB Circular A-136, Financial
Reporting Guidance, to disaggregate end of year expired unobligated balances and recoveries
of prior year unpaid obligations.
Note 2. Non-Entity Assets
As of September 30, 2016 and 2015, non-entity assets consisted of the following:
Non-Entity Assets
(Dollars in Millions)
2016 2015
Intragovern- With the Intragovern- With the
Non-Entity Assets
mental Public mental Public
Fund Balance with Treasury $ 231 $ - $ 69 $ -
Credit Program Receivables, Net - 449 - 410
Other Assets
Guaranty Agencies' Federal Funds - 1,197 - 1,561
Accounts Receivable, Net - 69 - 67
Total Non-Entity Assets 231 1,715 69 2,038
Entity Assets 96,634 1,076,227 103,628 1,017,384
Total Assets $ 96,865 $ 1,077,942 $ 103,697 $ 1,019,422
The Department’s FY 2016 assets are predominantly entity assets (99.8 percent), leaving the
small portion of assets remaining as non-entity assets. Non-entity intragovernmental assets
primarily consist of balances in non-agency receipt accounts, deposit accounts and clearing
accounts. Non-entity assets with the public primarily consist of guaranty agency reserves (69.8
percent), reported as Guaranty Agencies’ Federal Funds, and related Federal Perkins Loan
program loan receivables (26.2 percent), reported as credit program receivables, net. Federal
Perkins Loan program receivables are a non-entity asset because the assets are held by the
Department but are not available for use by the Department. The corresponding liabilities for
these non-entity assets are reflected in various accounts, including intragovernmental accounts
payable, Guaranty Agencies’ Federal Funds Due to Treasury, and other liabilities. (See Note 9)
58 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Note 3. Fund Balance with Treasury
Fund Balance with Treasury by status of funds and fund type, as of September 30, 2016 and
2015, consisted of the following:
Fund Balance with Treasury
(Dollars in Millions)
2016
General Revolving Special Trust All Other
Funds Funds Funds Funds Funds Total
Status of Funds
Unobligated Balance
Available $ 10,280 $ - $ - $ - $ - $ 10,280
Unavailable 902 15,480 12 - - 16,394
Obligated Balance, not Disbursed 54,240 15,630 1 - - 69,871
Other - - - - 218 218
Total Fund Balance with Treasury $ 65,422 $ 31,110 $ 13 $ - $ 218 $ 96,763
2015
General Revolving Special Trust All Other
Funds Funds Funds Funds Funds Total
Status of Funds
Unobligated Balance
Available $ 11,805 $ 550 $ - $ 1 $ - $ 12,356
Unavailable 1,394 13,886 14 - - 15,294
Obligated Balance, not Disbursed 52,638 23,260 1 1 - 75,900
Other - - - - 69 69
Total Fund Balance with Treasury $ 65,837 $ 37,696 $ 15 $ 2 $ 69 $ 103,619
Composition of Funds
A portion of the general funds is provided in advance by multiyear appropriations for obligations
anticipated during the current and future fiscal years. Revolving funds are derived from
borrowings, as well as collections from the public and other federal agencies. Special funds
include fees collected on delinquent or defaulted Perkins loans that have reverted back to the
Department from the initial lenders. Trust funds generally consist of remaining undisbursed
donations for the hurricane relief activities.
Status of Funds
Available unobligated balances represent amounts that are apportioned for obligation in the
current fiscal year. Unavailable unobligated balances represent amounts that are not
apportioned for obligation during the current fiscal year and expired appropriations no longer
available to incur new obligations. Total unavailable unobligated balance ($16,394 million)
differs from unapportioned and expired amounts on the SBR ($17,591 million) due to the
Guaranty Agencies’ Federal Funds ($1,197 million).
FY 2016 Agency Financial Report—U.S. Department of Education 59
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Note 4. Other Assets
Other assets, as of September 30, 2016 and 2015, were comprised of the following:
Other Assets
(Dollars in Millions)
2016 2015
Intragovern- With the With the
Intragovern-
mental Public Public
mental
Guaranty Agencies' Federal Funds $ - $ 1,197 $ - $ 1,561
Accounts Receivable, Net 1 137 2 101
Advances 101 3 76 2
Property and Equipment, Net - 24 - 21
Other - 2 - 4
Total Other Assets $ 102 $ 1,363 $ 78 $ 1,689
Note 5. Credit Programs for Higher Education: Credit Program
Receivables, Net and Liabilities for Loan Guarantees
The Department currently operates two major student loan programs, Direct Loan and FFEL.
The Direct Loan program offers four types of loans: Stafford, Unsubsidized Stafford, PLUS, and
Consolidation. Evidence of financial need is required for an undergraduate student to receive a
subsidized Stafford loan. The other three loan programs are available to borrowers at all
income levels. Loans can be used only to meet qualified educational expenses.
The Department holds $1,076.6 billion in outstanding credit program net receivables. This
outstanding balance is comprised primarily of direct loans, defaulted FFEL loans, and FFEL
loans purchased using authority provided in the Ensuring Continued Access to Student Loans
Act of 2008 (ECASLA). There are several other loan programs that the Department
administers—including the Federal Perkins Loan program, TEACH grant program, HEAL
program, and the Facilities Loan programs.
60 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Credit program receivables, as of September 30, 2016 and 2015, consisted of the following:
Credit Program Receivables, Net
(Dollars in Millions)
2016
Accrued Allowance for
Principal Net
Interest Subsidy
Direct Loan Program $ 902,754 $ 50,835 $ 5,292 $ 958,881
FFEL Program 109,804 18,191 (13,125) 114,870
Other Credit Programs for Higher Education 2,988 389 (549) 2,828
Total Credit Receivables $ 1,015,546 $ 69,415 $ (8,382) $ 1,076,579
2015
Accrued Allowance for
Principal Net
Interest Subsidy*
Direct Loan Program $ 800,811 $ 44,250 $ 35,496 $ 880,557
FFEL Program 114,704 17,529 2,471 134,704
Other Credit Programs for Higher Education 2,876 361 (765) 2,472
Total Credit Receivables $ 918,391 $ 62,140 $ 37,202 $ 1,017,733
* Includes allowance for subsidy and liability for loan guarantees
The federal student loan programs provide students and their families with the funds to help
meet postsecondary education costs. Funding for these programs is provided through
permanent indefinite budget authority. What follows is a comprehensive description of the
student loan programs at the Department, including summary financial data and subsidy rates.
William D. Ford Federal Direct Loan Program. The federal government makes loans directly
to students and parents through participating institutions of higher education under the Direct
Loan program. Direct Loans are originated and serviced through contracts with private vendors.
The Department records an estimated obligation each year for direct loan awards to be made
in a fiscal year based on estimates of schools’ receipt of aid applications. Half of all loan
awards are issued in the fourth quarter of the fiscal year. Loans awarded are typically
disbursed in multiple installments over an academic period. As a result, loans may be
disbursed over multiple fiscal years. Loan awards may not be fully disbursed due to students
leaving or transferring to other schools. The Department’s estimate may also not reflect the
actual amount of awards made. Based on historical averages, the Department expects
approximately 6.2 percent of the amount obligated for new loan awards will not be disbursed.
Direct Loan program loan receivables includes defaulted and nondefaulted loans owned and
held by the Department. Of the $953.6 billion in gross receivables, as of September 30, 2016,
$57.3 billion (6.0 percent) in loan principal was in default and had been transferred to the
Department’s defaulted loan servicer, compared to $44.1 billion (5.2 percent) as of September
30, 2015.
The allowance for subsidy represents the estimated cost (to taxpayers) of financing the entire
loan program for all loans outstanding. The subsidy cost figures are estimated using OMB-
reviewed financial modeling methodologies which are subject to the FCRA. The allowance is
the aggregate of all positive and negative subsidies as well as modification adjustments, at a
point in time, for the current fiscal year and all those prior.
Positive subsidies, which are resources provided by Treasury to the Department for continuing
loan origination and servicing activities, are required when estimated program cash outflows
FY 2016 Agency Financial Report—U.S. Department of Education 61
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
are expected to exceed inflows. Alternatively, when the estimated cash inflows are expected to
exceed outflows, the Department transfers excess subsidy funds back to the Treasury
(negative subsidy transfers). Positive subsidy increases aggregate program costs and negative
subsidy decreases aggregate program costs to taxpayers.
The estimation process used to determine the amount of positive or negative subsidy expense
each fiscal year, and subsequently the cumulative taxpayer cost of the program (allowance for
subsidy), is subject to various internal and external risk factors which often show strong
interdependence with one another. These risks include uncertainty about changes in the
general economy, changes in the legislative and regulatory environment, and changing trends
in borrower performance with regard to contractual cash flows within the loan programs.
Due to the complexity of the Direct Loan program, there is inherent projection risk in the
process used for estimating long-term program costs. As stated, some uncertainty stems from
potential changes in student loan legislation and regulations because these changes may
fundamentally alter the cost structure of the program. Operational and policy shifts, such as
growing efforts to increase borrower enrollment in income-driven repayment (IDR) plans, may
also affect program costs by causing significant changes in borrower repayment timing. Actual
performance may deviate from estimated performance, which is not unexpected given the long-
term nature of these loans (cash flows may be estimated up to 40 years), and the multitude of
projection paths and possible outcomes. The increasing enrollment of borrowers in the IDR
plans has made projection of borrower incomes a key input for the estimation process. This
uncertainty is directly tied to the macroeconomic climate and is another inherent program
element which displays the interrelated risks facing the Direct Loan program.
The following schedule provides a reconciliation between the beginning and ending balances of
the allowance for subsidy for the Direct Loan program:
Direct Loan Program Reconciliation of Allowance for Subsidy
(Dollars in Millions)
2016 2015
Beginning Balance, Allowance for Subsidy $ (35,496) $ (47,358)
Activity
Fee Collections 1,685 1,618
Loan Cancellations (5,065) (4,777)
Subsidy Allowance Amortization 17,815 16,373
Other (350) (460)
Total Activity 14,085 12,754
Subsidy Expense for Direct Loans Disbursed in the Current Year by
Component
Interest Rate Differential (15,463) (15,555)
Defaults, Net of Recoveries (127) 217
Fees (1,993) (1,678)
Other 11,887 10,830
Total of the Above Subsidy Expense Components (5,696) (6,186)
Loan Modification - 9,936
Components of Subsidy Re-estimates
Interest Rate Re-estimates (1,536) 1,506
Technical and Default Re-estimates 23,351 (6,148)
Upward/(Downward) Subsidy Re-estimates 21,815 (4,642)
Ending Balance, Allowance for Subsidy $ (5,292) $ (35,496)
62 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Loan cancellations include write-offs of loans because the borrower died, became disabled, or
declared bankruptcy. The interest rate re-estimate reflects the cost of finalizing the Treasury
borrowing rate to be used for borrowings received to fund the disbursed portion of the loan
awards obligated. The remaining components of subsidy expense for direct loans disbursed in
the current year consist of contract collection costs, program review collections, fees, loan
forgiveness under PAYE and other accruals. Components of the FY 2015 subsidy expense for
direct loans disbursed in the current year were reclassified to better reflect the fiscal year of
underlying loan disbursement versus actual subsidy disbursement. Due to the interaction of the
timing of disbursements by loan type and other underlying subsidy rates, the bulk of these
expenses for both the 2015 cohort and 2016 cohort were recorded in FY 2016.
The following schedule summarizes the Direct Loan interest expense and interest revenue for
the years ended September 30, 2016 and 2015:
Direct Loan Program Interest Expense and Revenue
(Dollars in Millions)
2016 2015
Interest Expense on Treasury Borrowing $ 30,503 $ 27,593
Total Interest Expense $ 30,503 $ 27,593
Interest Revenue from the Public $ 44,375 $ 39,760
Amortization of Subsidy (17,815) (16,373)
Interest Revenue on Uninvested Funds 3,943 4,206
Total Interest Revenue $ 30,503 $ 27,593
The following schedule summarizes the Direct Loan subsidy expense for the years ended
September 30, 2016 and 2015:
Direct Loan Program Subsidy Expense
(Dollars in Millions)
2016 2015
Subsidy Expense for New Direct Loans Disbursed
Interest Rate Differential $ (15,463) $ (15,555)
Defaults, Net of Recoveries (127) 217
Fees (1,993) (1,678)
Other 11,887 10,830
Total Subsidy Expense for New Direct Loans Disbursed (5,696) (6,186)
Loan Modification - 9,936
Upward/(Downward) Subsidy Re-estimates 21,815 (4,642)
Direct Loan Subsidy Expense $ 16,119 $ (892)
Direct Loan program re-estimated subsidy cost was adjusted upward by $21.8 billion in
FY 2016. The re-estimates reflect several updated assumptions: however, in this case, the size
of the net upward re-estimate was due largely to collection rates on defaulted loans and
repayment plan selection. Actual collections on defaults since FY 2011 were lower than
anticipated, which reduced estimated lifetime rates and increased the cost to the Department
by $10.1 billion. For repayment plan selection, a greater percentage of borrowers chose costlier
plans than had been estimated and increased the cost to the Department by $8.1 billion. The
FY 2016 Agency Financial Report—U.S. Department of Education 63
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
percentage of borrowers choosing an income-driven repayment plan was the primary cost
driver for that assumption.
Subsidy rates are sensitive to the difference between the borrowers’ rates and the rate the
Department is charged by Treasury on the debt to fund the loans; for example, a 1 percent
increase in projected borrower interest rates would reduce projected direct loan subsidy cost by
$4.8 billion. Re-estimated costs only include cohorts that are 90 percent disbursed; cohort
years 1994–2015. With the increase in income-driven repayment participation, the Department
also conducted sensitivities on incomes for students in IDR and Public Service Loan
Forgiveness (PSLF) plans. A 10 percent upward increase in borrower incomes decreases costs
almost $8.7 billion for cohorts 1994–2015. A 10 percent increase in PSLF plan participation
would increase costs $6.3 billion for cohorts 1994–2015.
Direct Loan program re-estimated subsidy cost was adjusted downward by $4.6 billion in
FY 2015. Updated discount rates for the 2014 and 2013 cohorts decreased cost by $6.2 billion.
Higher participation in income-dependent repayment plans increased cost by $15 billion. The
introduction of a new model for estimating income-driven repayment plan costs resulted in a
decrease in subsidy costs by $5.8 billion. Costs increased $1.8 billion due to increases in
default rates. Changes in prepayment rates reflect larger than expected prepayment activity,
leading to decreased interest earnings, resulting in $3.5 billion in upward subsidy cost. Costs
decreased $5.7 billion due to higher forbearance rates. Interest accrues during forbearance
and that interest is eventually paid to the Department. Other assumption updates produced
offsetting costs, with the remainder attributable to interest on the re-estimate.
FY 2015 Modification. Recorded subsidy cost of a loan is based on a set of assumed future
cash flows. Government actions that change these assumed future cash flows change subsidy
cost and are recorded as loan modifications. Loan modifications are recognized under the
same accounting principle as subsidy re-estimates. Modification adjustment transfers are
required to adjust for the difference between the discount rate used to calculate the cost of the
modification and the interest rate at which the cohort pays or earns interest.
The Department modified direct loans in FY 2015. Borrowers formerly ineligible for a more
generous PAYE repayment plan became eligible for a modified version of PAYE leading to
increased costs, resulting in a $9.3 billion upward modification of subsidy cost and a
$629 million net upward modification adjustment transfer. In FY 2015, the Department forgave
$2.1 billion in interest for borrowers participating in the PAYE/income-based repayment (IBR)
plans, which provide that, if the borrower’s monthly payment amount is not sufficient to pay the
accrued interest on the borrower’s direct subsidized loan or the subsidized portion of a direct
consolidation loan, the Secretary does not charge the borrower the remaining accrued interest
for a period not to exceed three consecutive years from the established repayment period start
date on that loan under the PAYE/IBR plan.
The subsidy rates applicable to the 2016 loan cohort year follow:
Direct Loan Subsidy Rates—Cohort 2016
Interest
Differential Defaults Fees Other Total
Stafford 6.82% 1.56% (1.68)% 4.98% 11.68%
Unsubsidized Stafford (8.34)% 1.06% (1.68)% 6.24% (2.72)%
PLUS (22.04)% 0.78% (4.27)% 5.38% (20.15)%
Consolidation 3.32% (0.50)% 0.00% 10.68% 13.50%
Total (4.40)% 0.65% (1.58)% 7.18% 1.85%
The subsidy rate represents the subsidy expense of the program in relation to the obligations or
commitments made during the fiscal year and are weighted on gross volume. The subsidy
64 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
expense for new direct loans reported in the current year relates to disbursements of loans
from both current and prior years’ cohorts. Subsidy expense is recognized when the
Department disburses direct loans. The subsidy expense reported in the current year may
include re-estimates. The subsidy rates shown above, which reflect aggregate positive subsidy
in the FY 2016 cohort, cannot be applied to direct loans disbursed during the current reporting
year to yield the subsidy expense, nor are these rates applicable to the portfolio as a whole.
The Department does not re-estimate student loan cohorts until they are at least 90 percent
disbursed. As a result, the financial statement re-estimate does not include a re-estimate of the
current year cohort. The first re-estimate of this cohort will take place upon execution of the
FY 2018 President’s Budget.
The subsidy costs of the Department’s student loan programs, especially the Direct Loan
program, are highly sensitive to changes in actual and forecasted interest rates. The formulas
for determining program interest rates are established by statute; the existing loan portfolio has
a mixture of borrower and lender rate formulas. Interest rate projections are based on
probabilistic interest rate scenario inputs developed and provided by OMB.
The following schedule summarizes the Direct Loan program loan disbursements by loan type
for the years ended September 30, 2016 and 2015:
Direct Loan Program Loan Disbursements by Loan Type
(Dollars in Millions)
2016 2015
Stafford $ (23,752) $ (23,953)
Unsubsidized Stafford (52,254) (52,698)
PLUS (19,001) (19,163)
Consolidation (45,518) (46,434)
Total Expenditures $ (140,525) $ (142,248)
The allocation of disbursements for the first three loan types is estimated based on historical
trend information.
Student and parent borrowers may prepay existing loans without penalty through a new
consolidation loan. Under the FCRA and requirements provided by OMB regulations, the
retirement of direct loans being consolidated is considered a collection of principal and interest.
This receipt is offset by the disbursement related to the newly created consolidation loan.
Underlying direct or guaranteed loans, performing or nonperforming, are paid off in their
original cohort; new consolidation loans are originated in the cohort in which the new
consolidation loan was obligated. Consolidation activity is taken into consideration in
establishing subsidy rates for defaults and other cash flows. The cost of new consolidations is
included in subsidy expense for the current-year cohort; the effect of prepayments on existing
loans could contribute to re-estimates of prior cohort subsidy costs. The net receivables include
estimates of future prepayments of existing loans through consolidations; they do not reflect
subsidy costs associated with anticipated future consolidation loans.
Direct loan consolidations were $46 billion during both FY 2016 and FY 2015. Under the FCRA,
the subsidy costs of new consolidation loans are not reflected until the future fiscal year in
which they are disbursed. The effect of the early payoff of the existing loans—those being
consolidated—is recognized in the future projected cash flows of the past cohort year in which
the loans were originated.
Federal Family Education Loan Program. As a result of the SAFRA Act, no new FFEL loans
have been made since July 1, 2010. Federal guarantees on FFEL program loans and
commitments remain in effect for loans made before July 1, 2010, unless they were sold to the
Department through an ECASLA program, consolidated into a direct loan, or otherwise
satisfied, discharged, or cancelled. As of September 30, 2016 and 2015, total principal
FY 2016 Agency Financial Report—U.S. Department of Education 65
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
balances outstanding of guaranteed loans held by lenders were approximately $197 billion and
$220 billion, respectively. As of September 30, 2016 and 2015, the estimated maximum
government exposure on outstanding guaranteed loans held by lenders was approximately
$193 billion and $215 billion, respectively. Of the insured amount, the Department would pay a
smaller amount to the guaranty agencies. The rates range from 75 to 100 percent of the loan
value depending on when the loan was made and the guaranty agency’s claim experience.
FFEL Program Loan Receivables
(Dollars in Millions)
2016
Loan
Accrued Allowance
Principal Guarantee Net
Interest for Subsidy
Liability
FFEL GSL Program (Pre-1992) $ 4,087 $ 5,674 $ (7,622) $ - $ 2,139
FFEL GSL Program (Post-1991) 35,645 6,562 (12,398) - 29,809
Loan Purchase Commitment 23,867 2,090 2,922 - 28,879
Loan Participation Purchase 44,434 3,600 4,347 - 52,381
ABCP Conduit 1,771 265 (374) - 1,662
FFEL Program Loan Receivables $ 109,804 $ 18,191 $ (13,125) $ - $ 114,870
2015
Loan
Accrued Allowance
Principal Guarantee Net
Interest for Subsidy
Liability
FFEL GSL Program (Pre-1992) $ 4,388 $ 6,149 $ (8,162) $ (10) $ 2,365
FFEL GSL Program (Post-1991) 33,415 5,756 (4,389) 3,398 38,180
Loan Purchase Commitment 26,474 1,981 4,410 - 32,865
Loan Participation Purchase 48,540 3,403 7,573 - 59,516
ABCP Conduit 1,887 240 (349) - 1,778
FFEL Program Loan Receivables $ 114,704 $ 17,529 $ (917) $ 3,388 $ 134,704
ECASLA gave the Department temporary authority to purchase FFEL loans and participation
interests in those loans. The Department implemented three activities under this authority: loan
purchase commitments; purchases of loan participation interests; and a put, or forward
purchase commitment, with an Asset-Backed Commercial Paper (ABCP) Conduit. This
authority expired after September 30, 2010; as a result, loan purchase commitments and
purchases of loan participation interests concluded. However, under the terms of the Put
Agreement with the conduit, ABCP Conduit activity ceased operations in January 2014.
The FFEL guaranteed student loan financing account had a negative estimated liability for loan
guarantees of $3.4 billion as of September 30, 2015. This indicated that expected collections
on anticipated future defaulted loans was in excess of default disbursements, calculated on a
net present value basis. Under GAAP, the negative estimated liability as of September 30,
2015, was classified as a component of credit program receivables on the consolidated
balance sheet.
66 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
The following schedule provides a reconciliation between the beginning and ending balances of
the liability for loan guarantees for the insurance portion of the FFEL program:
FFEL Program Reconciliation of Liabilities for Loan Guarantees
(Dollars in Millions)
2016 2015
Beginning Balance, FFEL Financing Account Liability for Loan Guarantees $ (3,398) $ (4,218)
Activity
Interest Supplement Payments (830) (896)
Claim Payments (6,678) (6,917)
Fee Collections 1,731 1,926
Interest on Liability Balance (1,766) (1,826)
Other 5,648 12,797
Total Activity (1,895) 5,084
Components of Loan Modification
Loan Modification Costs 151 -
Modification Adjustment Transfers 24 -
Loan Modification 175 -
Upward/(Downward) Subsidy Re-estimates 6,535 (4,264)
Ending Balance, FFEL Financing Account Liability for Loan Guarantees 1,417 (3,398)
FFEL Liquidating Account Liability for Loan Guarantees 12 10
FFEL Liabilities for Loan Guarantees $ 1,429 $ (3,388)
Other activity includes negative special allowance collections, collections on defaulted FFEL
loans, guaranty agency expenses, and loan cancellations due to death, disability, or
bankruptcy.
FY 2016 Agency Financial Report—U.S. Department of Education 67
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
The following schedules provide reconciliations between the beginning and ending balances of
the allowance for subsidy for the loan purchase commitment component and the loan
participation purchase component of the FFEL program. Loans in these programs are loans
acquired by the Department. Acquired loans are reported at their net present value of future
cash flows.
Loan Purchase Commitment Reconciliation of Allowance for Subsidy
(Dollars in Millions)
2016 2015
Beginning Balance, Allowance for Subsidy $ (4,410) $ (5,228)
Activity
Subsidy Allowance Amortization 644 724
Loan Cancellations (193) (274)
Contract Collection Cost and Other (40) (40)
Total Activity 411 410
Upward/(Downward) Subsidy Re-estimates 1,077 408
Ending Balance, Allowance for Subsidy $ (2,922) $ (4,410)
Loan Participation Purchase Reconciliation of Allowance for Subsidy
(Dollars in Millions)
2016 2015
Beginning Balance, Allowance for Subsidy $ (7,573) $ (8,373)
Activity
Subsidy Allowance Amortization 1,208 1,362
Loan Cancellations (355) (518)
Direct Asset Activities (74) (44)
Total Activity 779 800
Upward/(Downward) Subsidy Re-estimates 2,447 -
Ending Balance, Allowance for Subsidy $ (4,347) $ (7,573)
The following schedule provides FFEL program subsidy expense for the years ended
September 30, 2016 and 2015, respectively:
FFEL Program Subsidy Expense
(Dollars in Millions)
2016 2015
FFEL Loan Guarantee Program Subsidy Re-estimates $ 6,535 $ (4,264)
Loan Purchase Commitment Subsidy Re-estimates 1,077 408
Loan Participation Purchase Subsidy Re-estimates 2,447 -
FFEL Program Upward/(Downward) Subsidy Re-estimates 10,059 (3,856)
FFEL Guaranteed Loan Program Modification Costs 175 -
FFEL Program Subsidy Expense $ 10,234 $ (3,856)
FFEL guaranteed re-estimated subsidy cost was adjusted upward by $10.2 billion in FY 2016.
The net upward re-estimates in these programs were due primarily to collection rates on
defaulted loans which were lower than anticipated.
Subsidy rates are sensitive to interest rate fluctuations; for example, a 1 percent increase in
borrower interest rates and the guaranteed yield for lenders would increase projected FFEL
subsidy costs by $16.6 billion.
FFEL guaranteed re-estimated subsidy cost was adjusted downward by $3.9 billion in FY 2015.
Subsidy costs decreased $2.1 billion due to updated economic assumptions, including
68 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
probabilistic deterministic rates, which reflected historically low commercial paper rates,
resulting in substantially higher negative special allowance payments. Subsidy costs decreased
$706 million due to lower deferment rates on consolidated loans that have subsidized
components of outstanding debt. The Department pays interest benefits when loans are in
deferment, so lower deferment rates mean less interest benefits when loans are in deferment
and thus, less interest benefit payments to lenders. Other assumption updates produced
offsetting subsidy costs, with the remainder attributable to interest on the re-estimate.
FY 2016 Modification. In the FFEL program, private lenders provided loan capital, backed by
a federal guarantee on the loans. The federal government provided interest subsidies to
lenders and reimbursement to guaranty agencies for most of the costs associated with loan
defaults and other loan cancellations. The Consolidated Appropriations Act, 2016, increased
the guaranty agencies’ maximum reinsurance percentage on default claims from 95 percent to
100 percent. State and private nonprofit guaranty agencies provide services that include:
insurance payments to lenders for defaults, collection of some defaulted loans, default
avoidance activities, and counseling to schools, students, and lenders.
Other Credit Programs for Higher Education
Receivables, Net for Other Credit Programs for Higher Education
(Dollars in Millions)
2016
Loan
Accrued Allowance
Principal Guarantee Net
Interest for Subsidy
Liability
Federal Perkins Loans $ 385 $ 242 $ (178) $ - $ 449
TEACH Program Loans 698 101 (109) - 690
HEAL Program Loans 405 31 (99) - 337
Facilities Loan Programs 1,500 15 (163) - 1,352
Total $ 2,988 $ 389 $ (549) $ - $ 2,828
2015
Loan
Accrued Allowance
Principal Guarantee Net
Interest for Subsidy
Liability
Federal Perkins Loans $ 356 $ 222 $ (168) $ - $ 410
TEACH Program Loans 642 97 (108) - 631
HEAL Program Loans 415 28 (127) (193) 123
Facilities Loan Programs 1,463 14 (169) - 1,308
Total $ 2,876 $ 361 $ (572) $ (193) $ 2,472
Federal Perkins Loan Program. The Federal Perkins Loan program provides low-interest
loans to eligible postsecondary school students. In some statutorily defined cases, funds are
provided to reimburse schools for loan cancellations. For defaulted loans assigned to the
Department, collections of principal, interest, and fees, net of amounts paid by the Department
to cover contract collection costs, are transferred to Treasury annually.
TEACH Grant Program. The Department awards annual grants of up to $4,000 to eligible
undergraduate and graduate students who agree to serve as full-time mathematics, science,
foreign language, bilingual education, special education, or reading teachers at high-need
schools for four years within eight years of graduation. The maximum lifetime grant for students
is $16,000 for undergraduate programs and $8,000 for graduate programs. For students failing
to fulfill the service requirement, the grants are converted to direct unsubsidized Stafford
Loans. Since grants can be converted to direct loans, for budget and accounting purposes, the
program is operated as a loan program under the FCRA.
FY 2016 Agency Financial Report—U.S. Department of Education 69
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
The subsidy rates applicable to the 2016 loan cohort year follow:
TEACH Subsidy Rates—Cohort 2016
Interest
Differential Defaults Fees Other Total
Subsidy Rates 6.23% 0.21% 0.00% 6.61% 13.05%
HEAL Program. The Department assumed responsibility in FY 2014 for the HEAL program
and the authority to administer, service, collect, and enforce the program. The HEAL program
is structured as required by the FCRA. A liquidating account is used to record all cash flows to
and from the government resulting from guaranteed HEAL loans committed prior to 1992. All
loan activity for 1992 and beyond is recorded in corresponding financing accounts.
Facilities Loan Programs. The Department also administers the HBCU Capital Financing
program. Since 1992, this program has given HBCUs access to financing for the repair,
renovation, and, in exceptional circumstances, the construction or acquisition of facilities,
equipment, and infrastructure through federally insured bonds. The Department has authorized
a designated bonding authority to make loans to eligible institutions, charge interest, and collect
principal and interest payments. In compliance with HEA, as amended, the bonding authority
maintains an escrow account to pay the principal and interest on bonds for loans in default.
The total amount of support for HBCU programs, along with any accrued interest and unpaid
servicing fees, will be capitalized to principal and be reamortized through the original maturity
date of June 1, 2037. The Department has approximately $1.5 billion in outstanding borrowing
from the FFB to support loans made to HBCU institutions and $235 million obligated to support
near term lending as of September 30, 2016.
The Department administers the College Housing and Academic Facilities Loan (CHAFL)
program, the College Housing Loan program, and the Higher Education Facilities Loan
program. From 1952 to 1993, these programs provided low-interest financing to institutions of
higher education for the construction, reconstruction, and renovation of housing, academic, and
other educational facilities.
Administrative Expenses
Administrative expenses, for the years ended September 30, 2016 and 2015, consisted of the
following:
Administrative Expenses
(Dollars in Millions)
2016 2015
Direct Loan FFEL Direct Loan FFEL
Program Program Program Program
Operating Expense $ 721 $ 465 $ 653 $ 442
Other Expense 50 33 28 18
Total $ 771 $ 498 $ 681 $ 460
70 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Note 6. Liabilities Not Covered by Budgetary Resources
Liabilities not covered by budgetary resources include liabilities for which congressional action
is needed before budgetary resources can be provided. Although future appropriations to fund
these liabilities are likely, it is not certain that appropriations will be enacted to fund these
liabilities.
Liabilities Not Covered by Budgetary Resources
(Dollars in Millions)
2016 2015
Intragovern- With the Intragovern- With the
mental Public mental Public
Liabilities Not Covered by Budgetary Resources
Subsidy Due to Treasury General Fund $ 2,429 $ - $ 2,786 $ -
Other Liabilities
Federal Perkins Loan Program 437 - 395 -
Accrued Unfunded Annual leave - 40 - 38
FECA Liabilities 8 1 3 16
Custodial Liabilities 2 - - -
Total Liabilities Not Covered by Budgetary Resources $ 2,876 $ 41 $ 3,184 $ 54
Total Liabilities Covered by Budgetary Resources 1,129,411 9,642 1,058,889 6,189
Total Liabilities $ 1,132,287 $ 9,683 $ 1,062,073 $ 6,243
Note 7. Debt
Debt, as of September 30, 2016 and 2015, consisted of the following:
Debt
(Dollars in Millions)
2016
Beginning Ending
Borrowing Repayments
Balance Balance
Direct Loan Program $ 909,927 $ 146,992 $ (62,634) $ 994,285
FFEL Program 139,771 160 (8,584) 131,347
Other Credit Programs for Higher Education 2,078 224 (111) 2,191
Total $ 1,051,776 $ 147,376 $ (71,329) $ 1,127,823
2015
Beginning Ending
Borrowing Repayments
Balance Balance
Direct Loan Program $ 819,007 $ 159,667 $ (68,747) $ 909,927
FFEL Program 145,800 2,557 (8,586) 139,771
Other Credit Programs for Higher Education 1,864 268 (54) 2,078
Total $ 966,671 $ 162,492 $ (77,387) $ 1,051,776
The Department borrows from Treasury to fund the disbursement of new loans and the
payment of credit program outlays and related costs. During FY 2016, debt increased 7 percent
from $1,052 billion in the prior year to $1,128 billion. The Department makes periodic principal
payments after considering the cash position and liability for future outflows in each cohort of
loans, as mandated by the FCRA.
FY 2016 Agency Financial Report—U.S. Department of Education 71
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Approximately 88.2 percent of the Department’s debt, as of September 30, 2016, is attributable
to the Direct Loan program. The majority of the net borrowing activity (borrowing less
repayments) for the year was designated for funding new Direct Loan disbursements.
The Department also borrows from Treasury for activity in the other credit programs for higher
education. During FY 2016, TEACH net borrowing of $67 million was used for the advance of
new grants and repayments of principal made to Treasury. In FY 2016, debt in HBCU
increased by $63 million, or 4.52 percent. This total represents the aggregate of new bonds
administered and repayments made on previously issued bonds.
Note 8. Subsidy Due to Treasury General Fund
Subsidy Due to Treasury General Fund
(Dollars in Millions)
2016 2015
Credit Program Downward Subsidy Re-estimates
Direct Loan Program $ - $ 1,474
FFEL Program 213 3,977
Total Credit Program Downward Subsidy Re-estimates 213 5,451
Future Liquidating Account Collections
FFEL Program 2,253 2,603
Other Credit Programs for Higher Education 176 183
Total Future Liquidating Account Collections 2,429 2,786
Total Subsidy Due to Treasury General Fund $ 2,642 $ 8,237
When downward subsidy re-estimates are executed, the amounts will be transferred to the
Treasury General Fund in the following fiscal year. Future liquidating account collections
represent the net present value of estimated future excess collections (estimated collections in
excess of estimated outlays) for the Department’s pre-1992 FFEL and HEAL loan programs.
When collected, these liquidating account excess collections will also be returned to the
Treasury General Fund.
72 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Note 9. Other Liabilities
Other liabilities, as of September 30, 2016 and 2015, consisted of the following:
Other Liabilities
(Dollars in Millions)
2016 2015
Intragovern- With the Intragovern- With the
mental Public mental Public
Accounts Payable $ 1 $ 3,966 $ 1 $ 3,695
Accrued Grant Liability - 3,760 - 2,377
Guaranty Agencies' Funds Due to Treasury 1,197 - 1,561 -
Loan Guarantee Liability - 1,633 - -
Federal Perkins Loan Program 437 - 395 -
Miscellaneous Receipt, Deposit Funds and Clearing
Accounts 40 255 83 84
Advances from Others and Deferred Credits 11 9 14 18
Accrued Unfunded Annual Leave - 40 - 38
FECA Liabilities 8 1 3 16
Accrued Payroll and Benefits - 19 - 15
Employer Contributions and Payroll Taxes 126 - 3 -
Custodial Liability 2 - - -
Total Other Liabilities $ 1,822 $ 9,683 $ 2,060 $ 6,243
FY 2016 Agency Financial Report—U.S. Department of Education 73
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Note 10. Intragovernmental Cost and Exchange Revenue by
Program
As required by the GPRA Modernization Act of 2010, each of the Department’s major program
offices has been aligned with the goals presented in the Department’s Strategic Plan 2014–
2018. Strategic Plan Goals 1–5 guide the Department’s program offices to carry out the vision
and programmatic mission, and the net cost programs can be specifically associated with these
five strategic goals. The Department also has a cross-cutting Strategic Plan Goal 6, U.S.
Department of Education Capacity, focusing primarily upon improving the organizational
capacities of the Department to implement the Strategic Plan Goals 1–5. The costs associated
with Strategic Plan Goal 6 are allocated to Goals 1–5 based on the number of full-time
employee equivalents of each program. Some principal offices support more than one
Departmental strategic goal, but have been assigned to a single net cost program for the
purposes of this table based on their primary area of support.
Net Cost Program Program Office Strategic Goal
Goal 1: Postsecondary Education, Career and
Technical Education, and Adult Education.
FSA
Increase College Access, Increase college access, affordability, quality, and
OPE
Quality, and Completion completion by improving postsecondary education
OCTAE
and lifelong learning opportunities for youths and
adults.
Goal 2: Elementary and Secondary Education.
Improve the elementary and secondary education
system’s ability to consistently deliver excellent
instruction aligned with rigorous academic standards
while providing effective support services to close
Improve Preparation for achievement and opportunity gaps, and ensure all
College and Career from students graduate high school college- and career-
Birth Through 12th Grade, OESE ready.
Especially for Children with
High Needs Goal 3: Early Learning. Improve the health, social-
emotional, and cognitive outcomes for all children
from birth through 3rd grade, so that all children,
particularly those with high needs, are on track for
graduating from high school college- and career-
ready.
OELA Goal 4: Equity. Increase educational opportunities
Ensure Effective Educational
OCR for underserved students and reduce discrimination
Opportunities for All Students
OSERS so that all students are well-positioned to succeed.
Goal 5: Continuous Improvement of the U.S.
Education System. Enhance the education
Enhance the Education
IES system’s ability to continuously improve through
System’s Ability to
OII better and more widespread use of data, research
Continuously Improve
and evaluation, evidence, transparency, innovation,
and technology.
74 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Gross Cost and Exchange Revenue by Program
(Dollars in Millions)
2016
FSA OESE OSERS Other Total
Increase College Access, Quality, and Completion
Gross Cost
Intragovernmental $ 36,325 $ - $ - $ 120 $ 36,445
With the Public 56,707 - - 4,162 60,869
Total Gross Program Costs 93,032 - - 4,282 97,314
Earned Revenue
Intragovernmental (4,744) - - (6) (4,750)
With the Public (29,516) - - (50) (29,566)
Total Program Earned Revenue (34,260) - - (56) (34,316)
Total Program Costs 58,772 - - 4,226 62,998
Improve Preparation for College and Career from Birth Through 12th Grade, Especially for
Children with High Needs
Gross Cost
Intragovernmental - 183 - - 183
With the Public - 22,179 - 1 22,180
Total Gross Program Costs - 22,362 - 1 22,363
Earned Revenue
Intragovernmental - (5) - - (5)
With the Public - (11) - - (11)
Total Program Earned Revenue - (16) - - (16)
Total Program Costs - 22,346 - 1 22,347
Ensure Effective Educational Opportunities for All Students
Gross Cost
Intragovernmental - - 105 35 140
With the Public - - 15,973 812 16,785
Total Gross Program Costs - - 16,078 847 16,925
Earned Revenue
With the Public - - (10) (1) (11)
Total Program Earned Revenue - - (10) (1) (11)
Total Program Costs - - 16,068 846 16,914
Enhance the Education System's Ability to Continuously Improve
Gross Cost
Intragovernmental - - - 96 96
With the Public - - - 2,025 2,025
Total Gross Program Costs - - - 2,121 2,121
Earned Revenue
With the Public - - - (58) (58)
Total Program Earned Revenue - - - (58) (58)
Total Program Costs - - - 2,063 2,063
Net Cost of Operations $ 58,772 $ 22,346 $ 16,068 $ 7,136 $ 104,322
FY 2016 Agency Financial Report—U.S. Department of Education 75
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Gross Cost and Exchange Revenue by Program
(Dollars in Millions)
2015
FSA OESE OSERS Other Total
Increase College Access, Quality, and Completion
Gross Cost
Intragovernmental $ 33,873 $ - $ - $ 80 $ 33,953
With the Public 25,627 - - 4,117 29,744
Total Gross Program Costs 59,500 - - 4,197 63,697
Earned Revenue
Intragovernmental (5,134) - - (11) (5,145)
With the Public (26,413) - - (42) (26,455)
Total Program Earned Revenue (31,547) - - (53) (31,600)
Total Program Costs 27,953 - - 4,144 32,097
Improve Preparation for College and Career from Birth Through 12th Grade, Especially for Children with High
Needs
Gross Cost
Intragovernmental - 179 - - 179
With the Public - 22,169 - 2 22,171
Total Gross Program Costs - 22,348 - 2 22,350
Earned Revenue
Intragovernmental - (12) - - (12)
With the Public - (8) - - (8)
Total Program Earned Revenue - (20) - - (20)
Total Program Costs - 22,328 - 2 22,330
Ensure Effective Educational Opportunities for All Students
Gross Cost
Intragovernmental - - 91 33 124
With the Public - - 15,776 756 16,532
Total Gross Program Costs - - 15,867 789 16,656
Earned Revenue
Intragovernmental - - (2) - (2)
With the Public - - (8) (1) (9)
Total Program Earned Revenue - - (10) (1) (11)
Total Program Costs - - 15,857 788 16,645
Enhance the Education System's Ability to Continuously Improve
Gross Cost
Intragovernmental - - - 100 100
With the Public - - - 2,312 2,312
Total Gross Program Costs - - - 2,412 2,412
Earned Revenue
Intragovernmental - - - (4) (4)
With the Public - - - (55) (55)
Total Program Earned Revenue - - - (59) (59)
Total Program Costs - - - 2,353 2,353
Net Cost of Operations $ 27,953 $ 22,328 $ 15,857 $ 7,287 $ 73,425
76 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Note 11. Credit Program Interest Expense and Interest Revenue
For FY 2016 and FY 2015, interest expense and interest revenue for credit programs consisted
of the following:
Credit Program Interest Expense and Interest Revenue
(Dollars in Millions)
2016
Subsidy Subsidy
Interest Net Gross Interest Net
Amorti- Amorti-
Expense Expense Revenue Revenue
zation zation
Non- Non- Non-
Federal Federal
federal federal federal
Direct Loan
Program $ 30,503 $ - $ 30,503 $ 3,943 $ 44,375 $ (17,815) $ 30,503
FFEL Program 4,980 (1,766) 3,214 516 4,600 (1,902) 3,214
Other Credit
Programs for
Higher Education 66 - 66 12 79 (25) 66
Total $ 35,549 $ (1,766) $ 33,783 $ 4,471 $ 49,054 $ (19,742) $ 33,783
2015
Subsidy Subsidy
Interest Net Gross Interest Net
Amorti- Amorti-
Expense Expense Revenue Revenue
zation zation
Non- Non- Non-
Federal Federal
federal federal federal
Direct Loan
Program $ 27,593 $ - $ 27,593 $ 4,206 $ 39,760 $ (16,373) $ 27,593
FFEL Program 5,252 (1,826) 3,426 454 5,110 (2,138) 3,426
Other Credit
Programs for
Higher Education 60 - 60 13 72 (25) 60
Total $ 32,905 $ (1,826) $ 31,079 $ 4,673 $ 44,942 $ (18,536) $ 31,079
FY 2016 Agency Financial Report—U.S. Department of Education 77
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Note 12. Statement of Budgetary Resources
The SBR compares budgetary resources with the status of those resources. As of September
30, 2016, budgetary resources were $335 billion and net agency outlays were $160 billion. As
of September 30, 2015, budgetary resources were $350 billion and net agency outlays were
$167 billion.
New Obligations and Upward Adjustments by Apportionment Type
and Category
New obligations and upward adjustments by apportionment type and category, as of
September 30, 2016 and 2015, consisted of the following:
New Obligations and Upward Adjustments by Apportionment Type and Category
(Dollars in Millions)
2016 2015
Direct:
Category A $ 2,170 $ 2,083
Category B 304,270 318,212
Exempt from Apportionment 638 104
Total Direct Apportionment 307,078 320,399
Reimbursable:
Category A 3 4
Category B 63 64
New Obligations and Upward Adjustments $ 307,144 $ 320,467
New obligations and upward adjustments can be either direct or reimbursable. Reimbursable
obligations are those financed by offsetting collections received in return for goods and
services provided, while all other obligations are direct. The apportionment categories are
determined in accordance with the guidance provided in OMB regulations. Category A
apportionments are those resources that can be obligated in the current fiscal year without
restriction on the purpose of the obligation, other than to be in compliance with legislation
underlying programs for which the resources were made available. Category B apportionments
are restricted by purpose for which obligations can be incurred. In addition, some resources are
available without apportionment by OMB.
Unused Borrowing Authority
Unused borrowing authority and related changes in available borrowing authority, as of
September 30, 2016 and 2015, consisted of the following:
Unused Borrowing Authority
(Dollars in Millions)
2016 2015
Beginning Balance, Unused Borrowing Authority $ 54,829 $ 61,327
Current Year Borrowing Authority 167,400 171,807
Funds Drawn from Treasury (147,376) (162,492)
Borrowing Authority Withdrawn (13,862) (15,813)
Ending Balance, Unused Borrowing Authority $ 60,991 $ 54,829
The Department is given authority to draw funds from Treasury to finance the Direct Loan,
FFEL, and other loan programs. Unused borrowing authority is a budgetary resource and is
available to support obligations for these programs. The Department periodically reviews its
78 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
borrowing authority balances in relation to its obligations resulting in the withdrawal of unused
amounts.
Undelivered Orders at the End of the Period
Undelivered orders, as of September 30, 2016 and 2015, consisted of the following:
Undelivered Orders
(Dollars in Millions)
2016 2015
Budgetary $ 50,019 $ 49,838
Non-Budgetary 73,366 75,064
Undelivered Orders (Unpaid) $ 123,385 $ 124,902
Budgetary undelivered orders represent the amount of goods and/or services ordered which
have not been actually or constructively received. This amount includes any orders which may
have been prepaid or advanced but for which delivery or performance has not yet occurred.
Non-budgetary undelivered orders primarily represent undisbursed loan awards and related
negative subsidy.
Distributed Offsetting Receipts
The majority of the distributed offsetting receipts line item on the SBR represents amounts paid
from the Direct Loan program and FFEL program financing accounts to Treasury General Fund
receipt accounts for downward current fiscal year executed subsidy re-estimates and negative
subsidies. Distributed offsetting receipts, for the years ended September 30, 2016 and 2015,
consisted of the following:
Distributed Offsetting Receipts
(Dollars in Millions)
2016 2015
Negative Subsidies and Downward Re-estimates of Subsidies:
FFEL Program $ 2,550 $ 4,658
Direct Loan Program 7,881 8,211
Facilities Loan Programs 18 83
TEACH Program 5 31
HEAL Program - 19
Total Negative Subsidies and Downward Re-estimates 10,454 13,002
Other 312 103
Distributed Offsetting Receipts $ 10,766 $ 13,105
Explanation of Differences Between the Statement of Budgetary
Resources and the Budget of the United States Government
The FY 2018 Budget of the United States Government (President’s Budget), which presents
the actual amounts for the year ended September 30, 2016, has not been published as of the
issue date of these financial statements. The FY 2018 President’s Budget is scheduled for
release in February 2017.
FY 2016 Agency Financial Report—U.S. Department of Education 79
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
A reconciliation of the FY 2015 SBR to the FY 2017 President’s Budget (FY 2015 actual
amounts) for budgetary resources, obligations incurred, distributed offsetting receipts, and net
outlays is presented below.
SBR to Budget of the United States Government
(Dollars in Millions)
Distributed
Budgetary Obligations Offsetting
Resources Incurrred Receipts Net Outlays
Combined Statement of Budgetary
Resources $ 349,678 $ 320,467 $ 13,105 $ 167,138
Expired Funds (2,195) (997)
FFEL Guaranty Agency Amounts
Included in the President's Budget 9,239 9,240
Distributed Offsetting Receipts 13,105
Other (10) (3) 1 3
Budget of the United States
Government1 $ 356,712 $ 328,707 $ 13,106 $ 180,246
1 Amounts obtained from the Appendix, Budget of the United States Government, FY 2017
Reconciling differences exist because the President’s Budget excludes expired funds.
Additionally, the President’s Budget includes a public enterprise fund that reflects the gross
obligations by the FFEL program for the estimated activity of the consolidated federal fund of
the guaranty agencies. Ownership by the federal government is independent of the actual
control of the assets. Since the actual operation of the federal fund is independent from the
Department’s direct control, budgetary resources and obligations incurred are estimated and
disclosed in the President’s Budget to approximate the gross activities of the combined federal
fund. Amounts reported on the FY 2015 SBR for the federal fund are compiled by combining all
guaranty agencies’ annual reports to determine a net valuation amount for the federal fund.
Note 13. Reconciliation of Net Cost of Operations to Budget
The reconciliation of net cost of operations to budget reconciles the resources used to finance
activities, both those received through budgetary resources and those received through other
means, with the net cost of operations on the statement of net cost. This reconciliation provides
an explanation of the differences between budgetary and financial (proprietary) accounting, as
required by FASAB Standard No. 7, Accounting for Revenue and Other Financing Sources and
Concepts for Reconciling Budgetary and Financial Accounting.
Resources used to finance activities (section one) are reconciled with the net cost of operations
by: (a) excluding resources used or generated for items not part of the net cost of operations
(section two); and (b) including components of the net cost of operations that will not require or
generate resources in the current period (section three). The primary resources used to finance
activities that do not fund the net cost of operations include the acquisition of net credit program
assets, the liquidation of liabilities for loan guarantees, and subsidy re-estimates accrued in the
prior period. Significant components of the net cost of operations that will not generate or use
resources in the current period include subsidy amortization, interest on the liability for loan
guarantees, and increases in exchange revenue receivable from the public.
80 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
The reconciliation of net cost of operations to budget, as of September 30, 2016 and 2015, are
presented below:
Reconciliation of Net Cost of Operations to Budget
(Dollars in Millions)
2016 2015
Resources Used to Finance Activities:
New Obligations and Upward Adjustments $ 307,144 $ 320,467
Spending Authority from Offsetting Collections and Recoveries (136,094) (145,810)
Offsetting Receipts (10,766) (13,105)
Net Budgetary Resources Obligated 160,284 161,552
Imputed Financing from Costs Absorbed by Others 81 30
Other Financing Sources (5,124) (14,293)
Net Other Resources (5,043) (14,263)
Net Resources Used to Finance Activities 155,241 147,289
Resources Used or Generated for Items Not Part of the Net Cost of Operations:
(Increase)/Decrease in Budgetary Resources Obligated but Not Yet Provided 1,763 5,177
Resources that Fund Subsidy Re-estimates Accrued in Prior Period (2,598) (20,131)
Credit Program Collections 92,080 102,183
Acquisition of Fixed Assets (11) (15)
Acquisition of Net Credit Program Assets or Liquidation of Liabilities for Loan
Guarantees (161,826) (165,850)
Resources from Non-Entity Activity 5,196 14,948
Net Resources that Do Not Finance the Net Cost of Operations (65,396) (63,688)
Net Resources Used to Finance the Net Cost of Operations 89,845 83,601
Components of the Net Cost of Operations that Will Not Require or Generate Resources in the
Current Period:
Change in Depreciation - 1
Subsidy Amortization and Interest on the Liability for Loan Guarantees 17,977 16,710
Other 22 (1)
Total Components Not Requiring or Generating Resources 17,999 16,710
Increase/(Decrease) in Annual Leave Liability 2 1
Accrued Re-estimates of Credit Subsidy Expense 28,006 2,598
Increase in Exchange Revenue Receivable from the Public (31,611) (29,486)
Accrued Interest with Treasury 1 1
Other (+/-) 80 -
Total Components Requiring or Generating Resources in Future Periods (3,522) (26,886)
Total Components that Will Not Require or Generate Resources in the Current
Period 14,477 (10,176)
Net Cost of Operations $ 104,322 $ 73,425
FY 2016 Agency Financial Report—U.S. Department of Education 81
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
Note 14. Commitments and Contingencies
The Department discloses contingencies where any of the conditions for liability recognition are
not met and there is at least a reasonable possibility that a loss or an additional loss may have
been incurred in accordance with FASAB Standard No. 5, Accounting for Liabilities of the
Federal Government. The following commitments are amounts for contractual arrangements
that may require future financial obligations.
Future Minimum Lease Payments
The Department leases all or a portion of 17 privately owned and 10 publicly owned buildings in
20 cities. Estimated future minimum lease payments for the privately and publicly owned
buildings are presented below.
Future Minimum Lease Payments
(Dollars in Millions)
2016 2015
FY Amount FY Amount
2017 $ 74 2016 $ 83
2018 78 2017 76
2019 80 2018 81
2020 83 2019 79
2021 85 2020 82
After 2021 86 After 2020 84
Total $ 486 Total $ 485
Guaranty Agencies
The Department may assist guaranty agencies experiencing financial difficulties. The
Department has not done so in fiscal years 2016 or 2015 and does not expect to in future
years. No provision has been made in the financial statements for potential liabilities.
Federal Perkins Loan Program
The Federal Perkins Loan program provides financial assistance to eligible postsecondary
school students. In FY 2016, the Department provided funding of 83.0 percent of the capital
used to make loans to eligible students through participating schools at 5 percent interest. The
schools provided the remaining 17.0 percent of program funding. For the latest academic year
that ended June 30, 2016, approximately 421 thousand loans were made totaling $1.0 billion at
1,378 institutions, making an average of $2,480 per loan. The Department’s equity interest was
approximately $6.5 billion as of June 30, 2016.
Federal Perkins Loan program borrowers who meet statutory eligibility requirements—such as
those who provide service as teachers in low-income areas or as Peace Corps or AmeriCorps
VISTA volunteers, as well as those who serve in the military, law enforcement, nursing, or
family services—may receive partial loan forgiveness for each year of qualifying service.
The Federal Perkins Loan program was scheduled to officially end on September 30, 2015.
However, the program was extended through September 30, 2017 by the Federal Perkins Loan
Program Extension Act of 2015 (Extension Act). The Extension Act eliminated the Perkins Loan
grandfathering provisions that the Department had put in place, and establishes new eligibility
requirements for undergraduate and graduate students to receive Perkins Loans.
Litigation and Other Claims
The Department is involved in various lawsuits incidental to its operations. In the opinion of
management, the ultimate resolution of pending litigation will not have a material effect on the
Department’s financial position.
82 FY 2016 Agency Financial Report—U.S. Department of Education
FINANCIAL SECTION
NOTES TO THE FINANCIAL STATEMENTS
The cost of loan forgiveness related to the recent proprietary school closures reflected in the
accompanying financial statements is limited to claims received through September 30. On
November 1, 2016, the Department issued certain regulations that may affect the amount to
ultimately be paid related to these claims. The final disposition of claims filed and those yet to
be filed from schools closed before September 30 is not expected to have a material impact to
these financial statements.
Other Matters
Some portion of the current-year financial assistance expenses (grants) may include funded
recipient expenditures that are subsequently disallowed through program review or audit
processes. In the opinion of management, the ultimate disposition of these matters will not
have a material effect on the Department’s financial position.
FY 2016 Agency Financial Report—U.S. Department of Education 83
84
REQUIRED SUPPLEMENTARY INFORMATION
FINANCIAL SECTION
United States Department of Education
Combining Statement of Budgetary Resources
For the Year Ended September 30, 2016
(Dollars in Millions)
84
Office of Office of Special
Elementary and Education and
Secondary Rehabilitative
Combined Federal Student Aid Education Services Other
FY 2006 Performance and Accountability Report—U.S. Department of Education Non-Budgetary Non-Budgetary Non-Budgetary
Credit Reform Credit Reform Credit Reform
Financing Financing Financing
Budgetary Accounts Budgetary Accounts Budgetary Budgetary Budgetary Accounts
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1 $ 14,774 $ 14,437 $ 12,719 $ 14,236 $ 800 $ 273 $ 982 $ 201
Recoveries of Prior Year Unpaid Obligations 746 21,047 188 21,047 368 88 102 -
Other Changes in Unobligated Balance (+ or -) (772) (24,695) (374) (24,687) (87) (153) (158) (8)
Unobligated Balance from Prior Year Budget Authority, Net $ 14,748 $ 10,789 $ 12,533 $ 10,596 $ 1,081 $ 208 $ 926 $ 193
Appropriations (Discretionary and Mandatory) 87,924 24 41,948 24 22,145 16,493 7,338 -
Borrowing Authority (Discretionary and Mandatory) (Note 12) - 167,400 - 167,272 - - - 128
Spending Authority from Offsetting Collections (Discretionary and Mandatory) 522 53,608 470 53,563 3 - 49 45
Total Budgetary Resources $ 103,194 $ 231,821 $ 54,951 $ 231,455 $ 23,229 $ 16,701 $ 8,313 $ 366
Status of Budgetary Resources:
New Obligations Incurred and Upward Adjustments (Total) (Note 12) $ 90,802 $ 216,342 $ 44,567 $ 216,152 $ 22,316 $ 16,540 $ 7,379 $ 190
Unobligated Balance, End of Year:
Apportioned, Unexpired Accounts 10,280 - 8,782 - 846 - 652 -
Unapportioned, Unexpired Accounts 1,212 15,479 1,212 15,303 - - - 176
Unexpired Unobligated Balance, End of year $ 11,492 $ 15,479 $ 9,994 $ 15,303 $ 846 $ - $ 652 $ 176
Expired Unobligated Balance, End of Year 900 - 390 - 67 161 282 -
Unobligated Balance, End of Year (Total) $ 12,392 $ 15,479 $ 10,384 $ 15,303 $ 913 $ 161 $ 934 $ 176
Total Status of Budgetary Resources $ 103,194 $ 231,821 $ 54,951 $ 231,455 $ 23,229 $ 16,701 $ 8,313 $ 366
Change in Obligated Balance:
Unpaid Obligations
78,116 $ 19,286 $ 77,880 $ 14,950 $ 8,835 $ 9,574 $ 236
FY 2016 Agency Financial Report—U.S. Department of Education
Unpaid Obligations, Brought Forward, October 1 $ 52,645 $
New Obligations and Upward Adjustments 90,802 216,342 44,567 216,152 22,316 16,540 7,379 190
Outlays (Gross) (-) (88,452) (196,787) (43,449) (196,596) (21,584) (15,959) (7,460) (191)
Recoveries of Prior Year Unpaid Obligations (-) (746) (21,047) (188) (21,047) (368) (88) (102) -
Unpaid Obligations, End of Year $ 54,249 $ 76,624 $ 20,216 $ 76,389 $ 15,314 $ 9,328 $ 9,391 $ 235
Uncollected Payments
Uncollected Payments, Federal Sources, Brought Forward, October 1 (-) $ (3) $ (26) $ - $ (4) $ - $ - $ (3) $ (22)
Change in Uncollected Payments, Federal Sources (+ or -) 1 22 - - - - 1 22
Uncollected Payments, Federal Sources, End of Year (-) $ (2) $ (4) $ - $ (4) $ - $ - $ (2) $ -
Memorandum (Non-add) Entries
Obligated Balance, Start of Year (+ or -) $ 52,642 $ 78,090 $ 19,286 $ 77,876 $ 14,950 $ 8,835 $ 9,571 $ 214
Obligated Balance, End of Year (+ or -) $ 54,247 $ 76,620 $ 20,216 $ 76,385 $ 15,314 $ 9,328 $ 9,389 $ 235
Budget Authority and Outlays, Net:
Budget Authority, Gross (Discretionary and Mandatory) $ 88,446 $ 221,032 $ 42,418 $ 220,859 $ 22,148 $ 16,493 $ 7,387 $ 173
Actual Offsetting Collections (Discretionary and Mandatory) (-) (721) (114,123) (653) (113,986) - - (68) (137)
Change in Uncollected Customer Payments from Federal Sources
(Discretionary and Mandatory) (+ or -) 1 22 - - - - 1 22
Recoveries of Prior Year Paid Obligations (Discretionary and Mandatory) (+ or -) (1) (516) (1) (516) - - - -
Budget Authority, Net (Discretionary and Mandatory) $ 87,725 $ 106,415 $ 41,764 $ 106,357 $ 22,148 $ 16,493 $ 7,320 $ 58
Outlays, Gross (Discretionary and Mandatory) $ 88,452 $ 196,787 $ 43,449 $ 196,596 $ 21,584 $ 15,959 $ 7,460 $ 191
Actual Offsetting Collections (Discretionary and Mandatory) (-) (721) (114,123) (653) (113,986) - - (68) (137)
Outlays, Net (Discretionary and Mandatory) 87,731 82,664 42,796 82,610 21,584 15,959 7,392 54
Distributed Offsetting Receipts (-) (Note 12) (10,766) - (10,684) - - - (82) -
Agency Outlays, Net (Discretionary and Mandatory) (Note 12) $ 76,965 $ 82,664 $ 32,112 $ 82,610 $ 21,584 $ 15,959 $ 7,310 $ 54
United States Department of Education
Combining Statement of Budgetary Resources
FY 2016 Agency Financial Report—U.S. Department of Education
For the Year Ended September 30, 2015
(Dollars in Millions)
Office of Office of Special
Elementary and Education and
85
Secondary Rehabilitative
Combined Federal Student Aid Education Services Other
Non-Budgetary Non-Budgetary Non-Budgetary
Credit Reform Credit Reform Credit Reform
FY 2006 Performance and Accountability Report—U.S. Department of Education
Financing Financing Financing
Budgetary Accounts Budgetary Accounts Budgetary Budgetary Budgetary Accounts
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1 $ 14,837 $ 10,109 $ 12,642 $ 9,857 $ 836 $ 309 $ 1,050 $ 252
Recoveries of Prior Year Unpaid Obligations 1,978 20,727 921 20,727 643 271 143 -
Other Changes in Unobligated Balance (+ or -) (679) (23,984) (194) (23,978) (210) (140) (135) (6)
Unobligated Balance from Prior Year Budget Authority, Net $ 16,136 $ 6,852 $ 13,369 $ 6,606 $ 1,269 $ 440 $ 1,058 $ 246
Appropriations (Discretionary and Mandatory) 100,701 904 55,798 904 21,575 16,201 7,127 -
Borrowing Authority (Discretionary and Mandatory) (Note 12) - 171,807 - 171,624 - - - 183
Spending Authority from Offsetting Collections (Discretionary and Mandatory) 381 52,897 502 52,823 3 (184) 60 74
Total Budgetary Resources $ 117,218 $ 232,460 $ 69,669 $ 231,957 $ 22,847 $ 16,457 $ 8,245 $ 503
Status of Budgetary Resources:
New Obligations Incurred and Upward Ajdustments (Total) (Note 12) $ 102,444 $ 218,023 $ 56,950 $ 217,721 $ 22,047 $ 16,184 $ 7,263 $ 302
Unobligated Balance, End of Year:
Apportioned, Unexpired Accounts 11,806 550 10,473 550 677 33 623 -
Unapportioned, Unexpired Accounts 1,771 13,887 1,771 13,686 - - - 201
Unexpired Unobligated Balance, End of year $ 13,577 $ 14,437 $ 12,244 $ 14,236 $ 677 $ 33 $ 623 $ 201
Expired Unobligated Balance, End of Year 1,197 - 475 - 123 240 359 -
Unobligated Balance, End of Year (Total) $ 14,774 $ 14,437 $ 12,719 $ 14,236 $ 800 $ 273 $ 982 $ 201
Total Status of Budgetary Resources $ 117,218 $ 232,460 $ 69,669 $ 231,957 $ 22,847 $ 16,457 $ 8,245 $ 503
Change in Obligated Balance:
Unpaid Obligations
Unpaid Obligations, Brought Forward, October 1 $ 56,219 $ 80,316 $ 21,466 $ 80,104 $ 15,948 $ 8,921 $ 9,884 $ 212
New Obligations and Upward Adjustments 102,444 218,023 56,950 217,721 22,047 16,184 7,263 302
Outlays (Gross) (-) (103,847) (199,496) (58,209) (199,218) (22,402) (15,806) (7,430) (278)
Actual Transfers, Unpaid Obligations (Net) (+ o -) (193) - - - - (193) - -
REQUIRED SUPPLEMENTARY INFORMATION
Recoveries of Prior Year Unpaid Obligations (-) (1,978) (20,727) (921) (20,727) (643) (271) (143) -
Unpaid Obligations, End of Year $ 52,645 $ 78,116 $ 19,286 $ 77,880 $ 14,950 $ 8,835 $ 9,574 $ 236
Uncollected Payments
Uncollected Payments, Federal Sources, Brought Forward, October 1 (-) $ (1) $ (26) $ - $ (4) $ - $ - $ (1) $ (22)
Change in Uncollected Payments, Federal Sources (+ or -) (2) - - - - - (2) -
Uncollected Payments, Federal Sources, End of Year (-) $ (3) $ (26) $ - $ (4) $ - $ - $ (3) $ (22)
Memorandum (Non-add) Entries
Obligated Balance, Start of Year (+ or -) $ 56,218 $ 80,290 $ 21,466 $ 80,100 $ 15,948 $ 8,921 $ 9,883 $ 190
Obligated Balance, End of Year (+ or -) $ 52,642 $ 78,090 $ 19,286 $ 77,876 $ 14,950 $ 8,835 $ 9,571 $ 214
Budget Authority and Outlays, Net:
Budget Authority, Gross (Discretionary and Mandatory) $ 101,082 $ 225,608 $ 56,300 $ 225,351 $ 21,578 $ 16,017 $ 7,187 $ 257
FINANCIAL SECTION
Actual Offsetting Collections (Discretionary and Mandatory) (-) (713) (122,387) (647) (122,283) - - (66) (104)
Change in Uncollected Customer Payments from Federal Sources
(Discretionary and Mandatory) (+ or -) (2) - - - - - (2) -
Recoveries of Prior Year Unpaid Obligations (Discretionary and Mandatory) (+ or -) (2) (542) (2) (542) - - - -
Budget Authority, Net (Discretionary and Mandatory) $ 100,365 $ 102,679 $ 55,651 $ 102,526 $ 21,578 $ 16,017 $ 7,119 $ 153
Outlays, Gross (Discretionary and Mandatory) $ 103,847 $ 199,496 $ 58,209 $ 199,218 $ 22,402 $ 15,806 $ 7,430 $ 278
Actual Offsetting Collections (Discretionary and Mandatory) (-) (713) (122,387) (647) (122,283) - - (66) (104)
Outlays, Net (Discretionary and Mandatory) 103,134 77,109 57,562 76,935 22,402 15,806 7,364 174
Distributed Offsetting Receipts (-) (Note 12) (13,105) - (12,957) - - - (148) -
Agency Outlays, Net (Discretionary and Mandatory) (Note 12) $ 90,029 $ 77,109 $ 44,605 $ 76,935 $ 22,402 $ 15,806 $ 7,216 $ 174
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Required Supplementary Stewardship Information
OMB requires each federal agency to report on its stewardship over various resources
entrusted to it and certain responsibilities assumed by it that cannot be measured and
conveyed through traditional financial reports. These elements do not meet the criteria for
assets and liabilities required in the preparation of the Department’s financial statements
and accompanying footnotes, but are nonetheless important to understanding the agency’s
financial condition, strategic goals, and related program outcomes.
Stewardship Expenses
Stewardship expenses are substantial investments made by the federal government for the
long-term benefit of the nation. Because costs of stewardship resources are treated as
expenses in the financial statements in the year the costs are incurred, they are reported as
Required Supplementary Stewardship Information to highlight their benefit and to
demonstrate accountability for their use.
In the United States, the structure of education finance is such that state and local
governments play a much greater overall role than the federal government. Of the
estimated more than $1 trillion spent nationally on all levels of education, the majority of
funding comes from state, local, and private sources. In the area of elementary and
secondary education, nearly 90 percent of resources come from nonfederal sources. These
funds serve over 50 million students enrolled in public, private, and charter schools in the
United States and its territories, according to the National Center for Education Statistics.
See the National Center for Education Statistics Condition of Education for more
information.
With its relatively small role in total education funding, the Department strives to create the
greatest number of favorable program outcomes with a limited amount of taxpayer-provided
resources. This is accomplished by targeting areas in which funds will go the furthest in
doing the most good. Namely, federal funding is used to provide grant, loan, loan-
forgiveness, work-study, and other assistance to more than 20 million postsecondary
students. The majority of the Department’s $285 billion in gross outlays during FY 2016
were attributable to Direct Loan disbursements administered by FSA. Grant-based activity
under discretionary, formula, and need-based formats primarily accounted for the
remainder of the outlays.
Discretionary grants, such as the Federal TRIO Programs and the Teacher Incentive Fund,
are awarded on a competitive basis. When funds for these grants are exhausted, they
cease to be funded. The Department reviews discretionary grant applications using:
 a formal review process for selection,
 both legislative and regulatory requirements, and
 published selection criteria established for individual programs.
Formula grants, such as Title I and Title III of the Elementary and Secondary Education Act,
are not competitive. The majority go to school districts, as often as annually, on a formula
basis, and they:
 provide funds as dictated by a law and
 allocate funds to districts on a per-student basis.
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Need-based grants, including the Federal Pell grant, Federal Work Study, and the Federal
Supplemental Educational Opportunity Grant, are based on family income and economic
eligibility. While there are many state, institution (college or school), and privately sourced
need-based grants, most need-based grants are funded by the federal government where
the financial aid formula is determined by a combination of factors, including:
 family income and discretionary assets,
 expected family contribution, and
 dependency status of the student and other members of their family.
Further details on financial figures and program-level goals can be viewed in the
Department’s 2016 Budget Summary.
Investment in Human Capital
Human capital investments are defined similarly by OMB, in Circular A-136, and the
Statement of Federal Financial Accounting Standards No. 8, Supplementary Stewardship
Reporting. These investments are expenses included in net cost for education and training
programs intended to increase or maintain national economic productive capacity and
produce outputs and outcomes that provide evidence of maintaining or increasing national
productive capacity.
Departmentwide strategic goals are formed around the agency mission of promoting
student achievement and preparation for global competitiveness by fostering educational
excellence and ensuring equal access. The Department drives toward accomplishing this
mission by establishing priority areas. For 2016, the following six elements of focus were
enumerated in the Department’s Budget Request:
 increasing equity and opportunity for all students,
 strengthening support for teachers and school leaders,
 expanding high-quality preschool programs,
 augmenting affordability and quality in postsecondary education,
 promoting educational innovation and improvement, and
 improving school safety and climate.
Supplementing state and local government funding, the Department utilizes its annual
appropriations and outlay authority to foster human capital improvements across the nation
by supporting programs along the entire spectrum of “cradle to career” education. Direct
Loans, guaranteed loans, grants, and technical program assistance are administered and
monitored by FSA and numerous other program-aimed components of the Department. The
Institute of Education Sciences is the independent nonpartisan research arm of the
Department that aims to present scientific evidence on which to ground education practice
and policy while providing useful information to all stakeholders in the arena of American
education. Further details of each office and their work can be viewed on the Department’s
Coordinating Structure website.
The following table illustrates the Department’s expenses paid for bolstering the nation’s
human capital, broken out by the nature of the expense, for the last five years.
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Summary of Human Capital Expenses
(Dollars in Millions)
2016 2015 2014 2013 2012
Federal Student Aid Expense
Direct Loan Subsidy $ 16,119 $ (892) $ 8,126 $ (39,557) $ (10,720)
Federal Family Education Loan 10,234 (3,856) (6,585) (8,753) (14,381)
Program Subsidy
Perkins Loans, Pell and Other Grants 30,671 31,400 33,098 33,542 34,310
Program Operational Costs 308 242 206 222 192
Subtotal 57,332 26,894 34,845 (14,546) 9,401
Departmental Programs
Elementary and Secondary Education 22,155 22,146 22,832 22,221 22,137
Special Education and Rehabilitative
15,944 15,751 15,948 15,919 16,139
Services
American Recovery and Reinvestment - - - 2,623 7,651
Act and Education Jobs Fund
Other Departmental Programs 6,349 6,494 6,938 6,175 6,211
Program Operational Costs 625 511 667 703 481
Subtotal 45,073 44,902 46,385 47,641 52,619
Grand Total $ 102,405 $ 71,796 $ 81,230 $ 33,095 $ 62,020
Further detail regarding the nature of expenses and the recipient(s) of payments can be
seen in the Department’s financial statement footnotes (starting on page 50) and at the
Department’s USA Spending Agency Profile Page.
Program Outcomes
Favorable results in the various programs administered by the Department can be
interpreted in many ways. The “cradle to career” analogy in education culminates with the
successful completion of academic programs and the receipt of a degree. Accordingly, the
effectiveness of the Department’s investments in human capital can be gauged by changes
in the number of students who fully complete the requirements for earning a bachelor’s or
associate degree. This often final stepping stone in one’s educational career correlates
strongly with wage and/or salary increases for a person, due to the high-level skills
expected by employers of graduates entering the labor force. Attaining a degree has proven
to increase an individual’s job opportunity outlook for life, making them less susceptible to
general economic downturns and allowing them to afford living expenses more comfortably;
make debt payments, including student loans; and avoid delinquency and credit problems.
Increased employability makes Americans more competitive in the global labor market,
yielding lower unemployment, higher economic well-being, and greater national security.
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Interesting data regarding U.S. unemployment rates and average incomes published by the
Department of Labor in September 2016 are illustrated in the graphs below.
An inverse relationship is evident where persons who completed lower levels of education
experienced higher rates of unemployment. For example, as of September 2016, men and
women together had the following unemployment rates:
 8.5 percent for those who had not completed high school,
 5.2 percent for those who had completed high school, and
 2.5 percent for those who had completed a bachelor’s degree or higher.
Another relationship clearly exists for the effect on income based on whether an individual
has a high school education or a college education. For example, as of September 2016,
men and women had the following average incomes:
 $40,000 annually for men with a high school diploma,
 $69,000 annually for men with a college degree,
 $31,000 annually for women with a high school diploma, and
 $52,000 annually for women with a college degree.
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For further details on this data, please visit the U.S. Department of Labor’s Bureau of Labor
Statistics, Table A-4 for employment status or Table 5 for median income.
Nationally, progress is being made from early education, expanding through the time
college graduates enter the workforce, as well as later in life when they are repaying
student loan debt incurred for postsecondary education. Broad improvements to the system
increase equitable opportunities for every child to have the privilege to learn, develop life
skills, and succeed over the course of their adult life. These improvements certainly
accelerate the attainment of national educational goals.
Successful outcomes like these in early-focus areas lead to elementary school students
who continue to outperform their predecessor classes. This is shown in the fact that 4th and
8th grade metrics for aptitude tests in math and reading, presented by the National
Assessment of Educational Progress, are at their highest ever.
At the secondary level, the number of students graduating or completely fulfilling general
education requirements continues to rise each year. Increases are also taking place for all
levels of postsecondary degrees. Recent data shows that 91 percent of young adults aged
25–29 have a high school diploma or equivalent, 45 percent have an associate degree, and
34 percent have a bachelor’s degree or higher. For the same age range, expanded to
include those up to 34 years old, earnings were higher and unemployment was generally
lower for each increased level of education.
With increased completion of high school diplomas, participation in some form of
postsecondary education has also risen. In the 2013 cohort of students graduating from
high school, for example, 66 percent enrolled in college the following fall. Participation in
postsecondary programs is particularly higher for Black and Hispanic students, who have
shown a combined increase of 1.1 million students since 2008.
One important method used in the area of analyzing student loan programs, borrower
activity, and institution participation is the monitoring of default statistics. Each year,
substantial stewardship expenses incurred by the Department are aimed at lowering the
number of defaulted loans, defaulted borrowers, and disbursed dollars going into default.
This is done because every default—when a loan payment is missed for multiple months—
results in loan funds that are not replenished, missed opportunities to invest in other
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degree-seeking human capital, and additional resources used by the government in
attempting to collect its money. Each aspect of a default costs American taxpayers, affects
the federal budget, decreases economic well-being, and harms borrowers’ credit scores.
Although a direct and proven linkage does not exist between the two variables, the
Department feels strongly about its ability to mitigate the risk of default through various
efforts. Stewardship expenses for this postsecondary goal include those incurred to
increase borrower awareness of repayment options, encouraging third-party loan servicers
to work more effectively in helping students avoid default by devising viable repayment
plans, and by working with financial aid offices around the country to help them improve the
loan counseling provided to students who have yet to graduate or enter repayment.
Default statistics for the FY 2013 cohort of borrowers entering repayment were released at
the end of FY 2016. Of the 5.2 million borrowers entering repayment from October 1, 2012,
to September 30, 2013, 593,000 defaulted on their loan before September 30, 2015. This
borrower default rate of 11.3 percent across all institution types showed a decline from the
prior year rate of 11.8 percent for the 2012 cohort. It is important to note that this metric is
unadjusted for loan program facets, such as consolidations and forbearance.
Trends in default rates, among other indicating metrics monitored at the Department,
continue to support proof of favorable outcomes within programs at all levels. The figures
also effectively convey the synergetic nature of the Department’s mission for improving one
of the most important building blocks of the nation’s infrastructure. Individual achievements
fostered by the Department’s investments in human capital and supporting stewardship
expenses as far back as “the cradle” continue to build a powerful foundation for career
success and advancement of the nation, in and of itself, and against global competitors.
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Other Information
OTHER INFORMATION
About the Other Information Section
The Other Information section includes:
 improper payments reporting details,
 the schedule of spending,
 a summary of assurances,
 a summary of the Office of Inspector General’s (OIG’s) view on the Department’s
management and performance challenges for fiscal year (FY) 2017,
 freeze the footprint information, and
 civil monetary penalty inflation adjustment information.
Improper Payments Reporting Details
The Improper Payments Reporting Details summarize the Department’s efforts to prevent,
detect, and recover improper payments. It includes data regarding the Department’s high
risk programs, estimates of improper payments, root causes and corrective actions to
mitigate improper payments and recoveries of improper payments.
Combined Schedule of Spending
The Schedule of Spending (SOS) presents what money was available to spend, how the
money was spent, and who the money went to for the fiscal years ended September 30,
2015 and 2016. More information on the Department’s spending can be found at
USAspending.gov, a searchable website that provides information on federal awards and is
accessible to the public at no cost.
Summary of Financial Statement Audit and Management
Assurances
The Summary of Financial Statement Audit and Management Assurances provides
information on any material weaknesses reported by the agency or through the audit
process. The Department reported that it had not identified any material weaknesses in
FY 2016.
Office of Inspector General’s Management and Performance
Challenges
The OIG’s Management and Performance Challenges Report summarizes the
Department’s challenges for FY 2017. The OIG identified the following five challenges:
(1) Improper Payments, (2) Information Technology Security, (3) Oversight and Monitoring,
(4) Data Quality and Reporting, and (5) Information Technology System Development and
Implementation. The full report is available at the OIG website.
Freeze the Footprint
The Freeze the Footprint summarizes the Department’s efforts to comply with Office of
Management and Budget (OMB) Management Procedures Memorandum 2013-02, the
Freeze the Footprint policy implementing guidance. That guidance directs that all Chief
Financial Officers Act of 1990 departments and agencies shall not increase the total square
footage of their domestic office and warehouse inventory compared to an FY 2012
baseline.
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OTHER INFORMATION
Improper Payments Reporting Details
OMB Circular A-123, Appendix C, Requirements for Effective Estimation and Remediation
of Improper Payments, implements the provisions of the Improper Payments Information
Act of 2002, as amended by the Improper Payments Elimination and Recovery Act of 2010
(IPERA), and the Improper Payments Elimination and Recovery Improvement Act of 2012
(IPERIA), and directs federal agencies to review and assess all programs and activities
they administer and identify those determined to be susceptible to significant improper
payments. Significant improper payments are defined as those in any particular program
that exceed both 1.5 percent of program payments and $10 million annually, or that exceed
$100 million.
The Department determined that the Pell Grant and Direct Loan programs were susceptible
to significant improper payments risk based on the OMB Circular A-123, Appendix C,
definition. The Department also determined these two programs were susceptible to
improper payments risk based on the last risk assessments performed in FY 2014, as
described in the Risk Assessment subsection. In FY 2016, the Pell Grant and Direct Loan
programs continued to be susceptible to significant improper payments. Furthermore, the
Pell Grant and Direct Loan programs were designated by OMB as high-priority programs in
2011 and 2015, respectively. The Department continues to address the requirements to
comply with reporting on the Pell Grant and Direct Loan programs as risk susceptible and
high-priority programs. Details on improper payment estimates and reduction targets for
both programs are included within the Improper Payment Reporting subsection.
As described in the Analysis of Systems, Controls, and Legal Compliance section, despite a
robust internal controls framework, including controls intended to estimate, prevent, detect,
and recover improper payments, the OIG reported that the Department was not compliant
with IPERA because the FY 2015 improper payment rate did not meet the annual reduction
target for the Direct Loan program. The full report, including the Department’s response, is
available for review at the OIG website. The Department convened a workgroup with OIG
and OMB participation to evaluate and recommend improvements to the FY 2016
estimation methodology, and develop proposed corrective actions in response to the
FY 2015 IPERA Compliance Audit Report. The outcome of the workgroup included
revisions to the FY 2016 estimation methodology to address the findings, and to make
additional enhancements to the methodology as described in the Improper Payment
Sampling and Estimation Methodology subsection.
Programs Description
Pell Grant
The Pell Grant program, authorized under Title IV of the Higher Education Act of 1965
(HEA), provides need-based grants to low-income undergraduate and certain
postbaccalaureate students to promote access to postsecondary education.
Direct Loan
The Direct Loan program, added to HEA in 1993 by the Student Loan Reform Act of 1993,
authorizes the Department to make loans through participating schools to eligible
undergraduate and graduate students and their parents.
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Title I
The Title I program, authorized by the Elementary and Secondary Education Act of 1965,
as amended by the No Child Left Behind Act of 2002 and the Every Student Succeeds Act
of 2015, ensures that all children have a fair, equal, and significant opportunity to obtain a
high-quality education and reach, at a minimum, proficiency on challenging state academic
achievement standards and state academic assessments.
Risk Assessment
As required by OMB A-123, Appendix C, the Department assesses the risk of improper
payments at least once every three years for each program that is not already reporting an
improper payments estimate. Detailed information on the risk assessment process and
results is included within this subsection. A summary of the assessment is presented in the
Risk Assessment Results table below.
Risk Assessment Results
Last Risk Risk-
Program
Assessment Susceptible?
Federal Student Aid-Managed Programs
Federal Pell Grant FY 2014 Yes
The Teacher Education Assistance for College and Higher
FY 2014 No
Education Grant
Federal Supplemental Educational Opportunity Grant FY 2014 No
Iraq and Afghanistan Service Grant FY 2014 No
Federal Perkins Loan Program FY 2014 No
Federal Direct Loan Program FY 2014 Yes
Federal Family Education Loan Program FY 2014 No
Federal Work-Study Program FY 2014 No
Health Education Assistance Loan Program FY 2015 No
Other Department Programs
Title I FY 2016 No
Other Grant Programs FY 2016 No
Contract Payments FY 2016 No
Administrative Payments FY 2014 No
Federal Student Aid-Managed Programs
During FY 2014, a risk assessment was performed on all Federal Student Aid (FSA)-
managed programs, with the exception of the Health Education Assistance Loan (HEAL)
program. The HEAL program was transferred from the U.S. Department of Health and
Human Services to FSA on July 1, 2014, and a risk assessment was subsequently
performed in FY 2015.
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For all FSA-managed programs, risk assessment meetings were held with program owners,
key personnel, and other designees to discuss the inherent risk of improper payments
according to the following 10 risk factors:
 Newness of Program or Transactions;
 Complexity of Program or Transactions;
 Volume of Payments;
 Level of Manual Intervention;
 Changes in Program Funding Authorities, Practices, and Procedures;
 History of Audit Issues;
 Prior Improper Payments Reporting Results;
 Human Capital Management;
 Nature of Program Recipients; and
 Management Oversight.
Process owners assigned a rating to each risk factor based on their detailed understanding
of the programs and risk of improper payments. Weighted percentages were assigned to
each risk factor rating based on a judgmental determination of the direct or indirect impact
on improper payments. An overall risk score was then computed for each program,
calculated by the sum of the weighted scores for each risk factor and overall rating scale.
Based on risk assessments conducted in FY 2014 and FY 2015, the Department
determined that the Pell Grant and Direct Loan programs were susceptible to risk of
significant improper payments.
According to OMB Circular A-123, Appendix C, if a program has previously been identified
as susceptible to improper payments, but has documented at least two consecutive years
of improper payments that are below the IPERA threshold, the agency may request relief
from the annual reporting requirement for this program. The Federal Family Education Loan
(FFEL) program reported improper payment estimates below the statutory threshold during
FY 2013 and FY 2014. On August 4, 2015, OMB approved the Department’s request, with
OIG’s concurrence, for relief from improper payments reporting for the FFEL program.
Accordingly, the Department has formally reclassified the FFEL program as not susceptible
to significant improper payments.
In FY 2016, it was confirmed that there were no significant changes in legislation and/or
increases in funding necessitating reassessment of programs’ risk susceptibility. As a
result, risk assessments for FSA-managed programs will next be performed in FY 2017.
Other Department Programs
In 2014, the Department completed a risk assessment on administrative payments to
employees in accordance with IPERIA. These payments were inclusive of FSA. The areas
of administrative payments that were examined include: Salary/Locality Pay, Travel,
Purchase Cards, and Transit Benefits. The analysis included a review of actual recaptured
payments versus total outlay for each of the related payment areas and the likelihood of
payment errors. The Department determined that administrative payments to employees
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were not susceptible to significant improper payments. Administrative payments risk
assessment will next be performed in FY 2017.
The Department conducted a risk assessment of contract payments in FY 2013. During
FY 2016, the Department reassessed the risk of improper payments on contract payments,
including contracts managed by FSA, as required by OMB Circular A-123, Appendix C.
Given robust internal controls, the Department continues to experience an extremely low
volume of improper payments in contracts; as such, the assessment found contract
payments are not susceptible to significant improper payments.
The Department conducted risk assessments of all non-FSA managed grant programs in
FY 2013. During FY 2016, the Department reassessed the risk of improper payments on all
non-FSA-managed grant programs. While there is inherent risk that grant recipients may
fail to adequately document expenditures or expend funds on unallowable activities, the
FY 2016 assessments determined that none of the other grant programs were susceptible
to significant improper payments. The analysis included a quantitative review of questioned
costs from Single Audit findings versus total program expenditures, as well as a qualitative
review of other risk factors including changes in legislation or regulations and history of
audit findings. The list of all programs assessed in FY 2016 can be located here.
The non-FSA grant programs assessed in FY 2016 include Title I, which was not found to
be susceptible to significant improper payments. During FY 2016, the Department
requested relief, with OIG’s concurrence, from reporting Title I estimates on improper
payments since it demonstrated that the program had more than two consecutive years of
improper payments reporting below the IPERA thresholds. OMB approved the
Department’s request on March 4, 2016, with the caveat that a risk assessment be
conducted in both FY 2016 and FY 2017 to ensure that the enactment of the Every Student
Succeeds Act has not caused the Title I program to become susceptible to significant
improper payments. Given the Department’s plan and timeline for implementing the Every
Student Succeeds Act, the Department did not find the new legislation to increase the risk
of improper payments for Title I in FY 2016 to a significant level.
Sampling and Estimation Methodology
On September 17, 2014, the Department obtained approval from OMB to use an alternative
methodology for estimating improper payments for the Pell Grant and Direct Loan
programs. The alternative methodology leverages data collected through FSA Program
Reviews, which include procedures such as determining whether schools properly
performed verification of students’ self-reported income, identifying conflicting applicant
data, student academic performance, and eligibility on the disbursed funds for a sample of
students in each review. The alternative methodology, although it does not use statistical
sampling techniques, provides for a more efficient allocation of resources by integrating
the estimation methodology into core FSA monitoring functions. The Department
determined that it would be too costly and inefficient, and significantly increase the
burden on schools and students, to develop a rigorous statistical sampling methodology
that would provide a very tight precision rate (such as providing no more than 0.1 percent
over the established target as prescribed by OMB). The methodology, including updates to
address findings from the OIG’s FY 2015 IPERA Compliance Audit Report, is described in
detail on the Department’s improper payments website.
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On June 30, 2016, the Department submitted updates to the alternative sampling plan and
estimation methodology to OMB for approval in response to findings from the OIG’s
FY 2015 IPERA Compliance Audit Report, U.S. Department of Education’s Compliance
with Improper Payment Reporting Requirements for Fiscal Year 2015. In its report, OIG
noted that the prior estimation methodology did not include all improper payments in the
calculation of the estimates, such as improper payments resulting from recipients
submitting inaccurate self-reported income on the Free Application for Federal Student Aid
(FAFSA), all improper payments resulting from schools disbursing Pell Grant and Direct
Loan funds to students enrolled in ineligible programs or students attending ineligible
locations, and other improper payments not identified in Program Reviews. The OIG also
noted that the prior estimation methodology was susceptible to volatility and potential
inordinate impact of a single improper payment finding, and does not account for Program
Reviews that do not reach the Program Review Report stage in time for inclusion in the
estimated improper payment rates. The Department updated its methodology for FY 2016
to address these findings and to make additional enhancements. These updates include:
incorporation of misreported income over- and under-payment estimates from the
FAFSA/IRS Data Statistical Study into the Pell Grant improper payment rate to address
improper payments associated with inaccurate self-reported income on the FAFSA;
inclusion of Pell Grant and Direct Loan funds improperly disbursed to students enrolled in
ineligible programs or at ineligible locations within the Pell Grant and Direct Loan improper
payment rates; and expansion of the population of Program Reviews eligible for review.
OMB approved the Department’s updates to the alternative sampling plan and estimation
methodology on October 14, 2016.
The Department acknowledges that its alternative estimation methodology can lead to
volatile improper payment estimates. Although the sample size has increased year-over-
year, there continues to be variability in the improper payment estimates. This is largely due
to fewer program reviews being conducted at lower-risk schools. This category of schools
accounts for a large portion of the Direct Loan and Pell Grant program disbursements. As a
result, the potential exists for student-level test results of a single observation (such as a
single student or school) at lower-risk schools to significantly influence the improper
payment estimates, resulting in volatility of the model.
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OTHER INFORMATION
Improper Payment Reporting
Table 1. Improper Payment Reduction Outlook
(Dollars in Millions)
Underpayment $
CY + 3 Est. IP $
CY + 1 Est. IP $
CY + 2 Est. IP $
Overpayment $
CY Outlays (3)
PY Outlays (1)
CY + 1 Est.
CY + 1 Est.
CY + 2 Est.
CY + 2 Est.
CY + 3 Est.
CY + 3 Est.
CY IP % (4)
PY IP % (2)
Outlays (5)
Outlays (5)
Outlays (5)
CY IP $ (4)
PY IP $ (2)
Program
IP % (6)
IP % (6)
IP % (6)
or
CY
CY
Activity
Pell Grant 29,909.28 1.88 562.29 28,188.55 7.85 2,212.80 2,025.27 187.53 26,553 7.85 2,084.41 29,288 7.85 2,299.11 30,428 7.85 2,388.60
Direct Loan 98,771.65 1.30 1,284.03 97,182.77 3.98 3,867.87 3,771.26 96.61 100,105 3.98 3,984.18 105,039 3.98 4,180.55 110,514 3.98 4,398.46
Title I (7) 15,715.00 .127 19.95 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
TOTAL (8) 144,395.93 1.29 1,866.27 125,371.32 4.85 6,080.67 5,796.53 284.14 126,658 4.79 6,068.59 134,327 4.82 6,479.66 140,942 4.82 6,787.06
(1)
The source of FY 2015 outlays for all programs is FSA’s Financial Management System (FMS) as presented in the FY 2015 AFR.
(2)
The PY improper payment estimates reported in the table above reflect the improper payment estimates for FY 2015 as reported in the FY 2015 AFR. FSA has published
recalculated FY 2015 improper payment rates in response to the FY 2015 IPERA Compliance Audit Report published by OIG on May 10, 2016. The updated improper payment rates
are prepared in accordance with OMB-approved methodologies. The estimated improper payment rate and improper payment total for the Direct Loan program as recalculated are
2.63% and $2,597.69 million, respectively. The estimated improper payment rate and improper payment total for the Pell Grant program as recalculated are 1.52% and $454.62
million, respectively. These estimates are reported using the alternative sampling and estimation methodology approved as of October 20, 2015.
(3)
The source of FY 2016 outlays for all program amounts is FMS.
(4)
In FY 2016, the Pell Grant and Direct Loan program improper payment estimates are reported using the updated alternative sampling and estimation methodology approved by
FY 2016 Agency Financial Report—U.S. Department of Education
OMB on October 14, 2016. FY 2016 rates are based on program reviews performed in FYs 2014–16 for award year 2013–14 data. Under the updated methodology, two new
sources were incorporated into the FY 2016 improper payment estimates, which impacted the estimates for both programs. For the Pell Grant program, incorporating improper
payment estimates resulting from recipients submitting inaccurate self-reported income on the FAFSA impacted the estimate by approximately 1.34% while incorporating improper
payment estimates resulting from schools disbursing funds to students enrolled in ineligible programs/locations impacted the estimate by approximately 0.13%. For the Direct Loan
Program, incorporating improper payment estimates resulting from schools disbursing funds to students enrolled in ineligible programs/locations impacted the Direct Loan estimate
by approximately 1.15%.
(5)
The source of FYs 2017–19 Pell Grant and Direct Loan outlay amounts is the FY 2017 President’s Budget at the Mid-Session Review.
(6)
The Department uses an OMB-approved alternative estimation methodology to estimate improper payments for the Pell Grant and Direct Loan programs. These estimates lack the
precision of other estimates developed using random, statistical methodologies. As disclosed above, although the sample size has increased year over year, there continues to be
both imprecision and variability in the improper payments estimates that limit management’s confidence in using these results to establish out-year reduction targets. Accordingly,
out-year targets are set to the CY IP% until the methodology is stabilized and the precision and volatility constraints are addressed. In FY 2017, the Department will continue to work
with relevant stakeholders to consider ways to increase precision and decrease volatility in future year methodologies and estimates. Increases in the improper payment rates over
the prior year and failure to meet the targets can be attributed to changes to and the imprecision of the alternative methodology, as opposed to a control failure or increase in actual
improper payments in the underlying programs.
(7)
Title I has historically been included in this table because it is a former Section 57 program and OMB A-11, dated 2002, Section 57, Exhibit 57B required agencies to report on
programs deemed at risk for erroneous payments. However, in FY 2016, the Department requested relief, with OIG’s concurrence, from reporting Title I estimates on improper
payments since it demonstrated that the program had more than two consecutive years of improper payments reporting below the IPERA thresholds. OMB approved the Department’s
request on March 4, 2016, with the caveat that a risk assessment be conducted in FY 2016 and FY 2017 to ensure the enactment of the Every Student Succeeds Act has not caused
the Title I program to become susceptible to significant improper payments.
(8)
The total of the estimates for the agency does not represent a true statistical estimate for the agency.
OTHER INFORMATION
IMPROPER PAYMENTS REPORTING DETAILS
High-Priority Programs
In FY 2011, OMB designated the Pell Grant program a high-priority program, because
estimated FY 2010 Pell Grant improper payments of $1,005 million exceeded the OMB
FY 2010 high-priority program threshold of $750 million. Since then, the Department has
worked with OMB to implement all applicable high-priority program requirements. On
February 4, 2015, OMB also designated the Direct Loan program as a high-priority program
as estimated improper payments of $1,532 million in FY 2014 exceeded the statutory
$750 million threshold.
Under the Executive Order 13520, agencies with high-priority programs shall establish annual
or semiannual measurements or actions for reducing improper payments. The Department
submitted supplemental measures for the Pell Grant and Direct Loan programs to OMB to be
approved for FY 2015 reporting. OMB granted approval on October 3, 2015.
The supplemental measure for the Pell Grant program is based on the total number of Pell
Grant-eligible applicants who transferred tax data from the IRS to their FAFSA as a
percentage of the total number of Pell Grant-eligible applicants who were determined to be
eligible to use the Internal Revenue Service Data Retrieval Tool (IRS DRT) to transfer tax
data.
For the Direct Loan program, a similar supplemental measure is in place based on the total
number of Direct Loan recipients who transferred tax data from the IRS to the FAFSA as a
percentage of the total number of Direct Loan recipients who were determined to be eligible
to use the IRS DRT to transfer tax data.
The supplemental measures for the Pell Grant and Direct Loan programs focus on the higher
risk area of misreported income by the student/parent on the FAFSA. Use of the IRS DRT to
directly transfer tax information from IRS to the online FAFSA verifies applicants’ income, and
as applicable their parents’ income, to determine how much aid they are eligible to receive.
Errors in income on an application is one of the root causes of improper payments for both
the Direct Loan and Pell Grant programs; transferring tax data to the FAFSA with the IRS
DRT helps ensure that the income is more accurate and therefore reduces the likelihood of
an improper payment being made. The Department continues to focus on efforts to increase
the population of applicants eligible to use the IRS DRT as described in the Improper
Payment Corrective Actions section below.
The Pell Grant and Direct Loan supplemental measure rates for award year 2015–16 are
61.99 and 59.26, respectively. The Pell Grant and Direct Loan supplemental measure targets
for award year 2016–17 are also 61.99 and 59.26, respectively. The supplemental measures,
current FY supplemental measure rates, and supplemental measure targets are reported
annually on PaymentAccuracy.gov for both programs.
On May 10, 2015, the Federal Student Aid PIN was replaced with FSA ID, improving the
security and customer experience for the Department’s student- and borrower-based
websites. Students, parents, and borrowers are required to use an FSA ID, made up of a
username and password, to access certain Department websites and tools, including the IRS
DRT. As a result of the transition, IRS DRT usage dropped from previous levels. IRS DRT
usage is expected to remain at award year 2015–16 levels through award year 2016–17.
FSA continues to work to ensure that the transition to the FSA ID is as seamless as possible
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for its customers. The Department also continues to encourage students and parents to use
the IRS DRT to import data from their tax return and not change it. It is the fastest, easiest,
and most secure method of meeting income verification requirements. FSA has modified
FAFSA on the Web to encourage all eligible applicants and parents to use the IRS DRT,
including displaying new messages to explain the advantages to using the IRS DRT on the
initial student and parent finances pages, and directing eligible applicants and parents who do
not opt to link to the IRS from these pages to a new page that recommends IRS DRT use.
Measures to Ensure Program Access
FSA is committed to ensuring program access and providing federal student aid to all
eligible students pursuing postsecondary education. The IRS DRT supports access to aid
programs by allowing students to transfer tax data directly from the IRS to the online FAFSA
and lessens the burden of income verification. We continue to offer additional application
methods to individuals to ensure that applicants can take advantage of an application option
that best suits their personal needs. Furthermore, improvements in the last few years to the
FAFSA and IRS DRT have resulted in a decrease in the average time it takes a student to
complete the online FAFSA.
On February 4, 2013, FSA’s Customer Experience group announced a partnership alliance
between FSA and the IRS. The partnership focuses on reaching more individuals in low- to
moderate-income communities with the goal of providing them with information, assistance,
and access to relevant IRS and FSA services. The partnership is expected to contribute to
increased awareness of FSA programs and create opportunities for increased access to the
FAFSA.
Beginning with the 2013 tax year (the 2014–15 FAFSA Processing Year), the IRS has
added a new, more efficient way that tax filers can request and receive Tax Return
Transcripts. With the new IRS “Get Transcript Online” tool, the tax filer submits an online
transcript request to the IRS and, if the request is authenticated, a second window displays
the transcript in Portable Document Format. This new IRS tool potentially reduces the
burden on FAFSA applicants who are requested to provide tax transcripts.
In March 2014, the Department launched the FAFSA Completion Initiative, through which
the Department is partnering with state student grant agencies to allow these agencies to
provide secondary schools, school districts, and certain designated entities with limited, yet
important, information on student progress in completing the FAFSA form. The initiative will
enable state student grant agencies and their school and district partners to identify those
students who have not filed a FAFSA form and better target counseling, filing help, and
other resources to those students.
Improper Payment Root Cause Categories
Our analysis indicated that the underlying root cause of improper payments for the Pell
Grant and Direct Loan program in FY 2016 was failure to verify financial data and
administrative or process errors made by other parties. The root causes were identified
through improper payment testing and categorized using categories of error as defined in
the October 2014 update to OMB Circular A-123, Appendix C (OMB Memorandum
M-15-02). Specific root causes associated with the “Failure to Verify – Financial Data”
category include, but are not limited to, ineligibility for a Pell Grant or Direct Loan and
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incorrect self-reporting of an applicant’s income that leads to incorrect awards based on
Expected Family Contribution. Specific root causes associated with the “Administrative or
Process Errors Made by – Other Party” category include, but are not limited to, incorrect
processing of student data by institutions during normal operations; student account data
changes not applied or processed correctly; satisfactory academic progress not achieved;
incorrectly calculated return records by institutions returning Title IV student aid funds; and
processing errors at the servicer level. Table 2 below, Improper Payment Root Cause
Category Matrix, summarizes the root cause categories for the Pell Grant and Direct Loan
programs.
Table 2. Improper Payment Root Cause Category Matrix
(Dollars in Millions)
Direct Loan Pell Grant
Reason for Improper Payment Over- Under- Under-
Over-payments
payments payments payments
Program Design or Structural Issue
Inability to Authenticate Eligibility
Death Data
Financial Data $92.39 $0 $328.28 $24.41
Excluded Party
Data
Failure to Verify:
Prisoner Data
Other Eligibility
Data (explain)
Federal Agency
State or Local
Agency
Other Party
Administrative (e.g.,
or Process participating
Error Made by: lender, health
care provider, or $3,678.87 $96.61 $1,696.99 $163.12
any other
organization
administering
federal dollars)
Medical Necessity
Insufficient Documentation to Determine
Other Reason (a) (explain)
Other Reason (b) (explain)
TOTAL $3,771.26 $96.61 $2,025.27 $187.53
Improper Payment Corrective Actions
This section presents the corrective actions for the Pell Grant and Direct Loan programs.
The corrective actions presented below are recommendations to the schools for findings
that resulted from FSA Program Reviews. The discussion below also includes other long-
term corrective actions applicable to these programs, such as the IRS DRT and verification.
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Corrective Actions – Root Cause Category: Failure to Verify Data
Error Cause Corrective Actions Completion Timeline
Failure to Final Program Review Determinations Completion dates for
Verify indicate the action(s) institutions are required findings identified via the
Financial Data to take in order to make the Title IV, HEA Program Review process
programs, or the recipients, whole for any vary. Overall, FSA
funds that were improperly managed and to requires that all findings
prevent the same problems from recurring. identified during the FSA
Program Reviews are
FSA continues to utilize and promote the IRS
tracked through resolution
DRT, which enables Title IV student aid
via the Postsecondary
applicants and, as needed, parents of
Education Participants
applicants, to transfer certain tax return
System (PEPS). This
information from an IRS website directly to
corrective action process
their online FAFSA.
is further described in the
For the 2017–18 award year, applicants are FY 2012 AFR.
able to complete their FAFSA using “prior-
Promotion of the IRS
prior year” tax data. For the 2017–2018
DRT will continue in
FAFSA, students and families provide income
FY 2017 and beyond.
information from calendar year 2015 and not
from calendar year 2016. This is in contrast On October 1, 2016, the
with the “prior year” process previously 2017–18 FAFSA became
employed where many applicants submitted available, as opposed to
their FAFSAs before tax returns were January 1, 2017, with the
completed, resulting in the need to estimate ability to use “prior-prior
income and tax information that subsequently year” tax data. Both of
needed to be corrected once the tax return these changes will assist
was filed; or worse, waited to complete their in preventing improper
FAFSA until after the tax return had been payments as it provides
filed. greater access to IRS
DRT and there is more
Additionally, FSA continues to enhance
time for effective
verification procedures and require selected
verification procedures.
schools to verify specific information reported
on the FAFSA by student aid applicants. As Enhancements to
with prior years’ verification selection, data- verification procedures is
based statistical analysis will continue to be a continuous process that
used by the Department to select for is reviewed each award
verification the 2017–2018 FAFSA applicants year.
with the highest statistical probability of error
and the impact of such error on award
amounts.
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Corrective Actions – Root Cause Category: Administrative or Process Errors
Error Cause Corrective Actions Completion Timeline
Administrative Final Program Review Determinations Completion dates for
or Process indicate the action(s) the institution is findings identified via the
Errors by Other required to take in order to make the Title IV, Program Review process
Party HEA programs, or the recipients whole for vary. Overall, FSA
any funds that were improperly managed and requires that all findings
to prevent the same problems from recurring. identified during the FSA
Program Reviews are
tracked through resolution
via PEPS. This corrective
action process is further
described in the FY 2012
AFR.
Administrative FSA is coordinating with the respective Title Improper payments
or Process IV Additional Servicers (TIVAS) and Not-For- identified through testing
Errors by Other Profit (NFP) servicers to develop and of Direct Loan
Party (Improper implement corrective action plans to address Consolidations for
FFEL to Direct consolidation errors, such as funds returned FY 2016 were remediated
Loan due to duplicate funding or multiple Loan or are in the process of
Consolidations) Verification Certificates (LVCs), inclusion of being remediated during
student loans that the borrower desired to FY 2017.
exclude or were determined to be ineligible,
and payoffs sent to the wrong address. FSA
will work to reevaluate the current LVC
processing procedures and will consider
improvements in system edits to prevent the
processing of duplicate LVCs and ineligible
loans. Additionally, management will consider
additional trainings on processing LVCs to
ensure the correct account, lender, and loan
information is processed in an effort to reduce
the risk of potential improper payments.
Administrative FSA is coordinating with the respective Improper payments
or Process TIVAS and NFP servicers to develop and identified through testing
Errors by Other implement corrective action plans to address of Direct Loan Refunds for
Party (Improper refund errors, such as refunds made to FY 2016 were remediated
Direct Loan ineligible lenders and borrowers, made for or are in the process of
Refunds) ineligible purposes, made in the incorrect being remediated during
amount, and/or sent to the incorrect payee. FY 2017.
FSA will also consider additional trainings on
refund processing to help ensure refunds are
made in a manner consistent with FSA
guidance.
Additional Corrective actions are described in the FY 2012 AFR. These include actions the
Department continues to take to prevent improper payments, such as activities to improve
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institutional level administration of Title IV Aid through development and dissemination of
information, resources, and tools to institutions.
Going forward, FSA will expand the use of data analytics to identify anomalies, trends, and
patterns in application and disbursement data to help identify potential risk factors that may
inform risk-based decisions regarding program oversight. FSA will further collaborate with
OIG to receive and analyze fraud referrals and to identify potential fraud indicators for
suspicious student activity. FSA has established a fraud group and engaged contract
support to review and act on OIG fraud referrals. The primary objective of initial activities
includes the intake, analysis, and disposition of referrals. FSA uses this analysis to inform
recommendations on data analytics and identify ways to improve controls.
Internal Control Over Payments
The Department developed robust internal controls to prevent, detect, and recover improper
payments. In designing controls, the Department strives to strike the right balance between
providing timely and accurate payments to grant recipients and students, while at the same
time ensuring that the controls are not too costly and burdensome to fund recipients.
Additionally, the Department must rely on controls established by fund recipients who make
payments on behalf of the Department. These controls are outside of the Department’s
operational authority and present higher risks, as evidenced by OIG work identifying
instances of questioned costs and restitution payments along with the fact that the majority
of the estimated improper payments in FY 2016 are attributed to root causes associated
with these third parties.
The Department’s controls over improper payments are an essential part of the
Department’s internal control framework described in the Analysis of Systems, Controls,
and Legal Compliance section. As described above, the Department uses an alternative
methodology to estimate the improper payment rates for the Pell Grant and Direct Loan
programs. The Department continues to assess and enhance its controls over student aid
payments. For example, the Department routinely analyzes application and payment data
and considers other factors, such as program reviews and audit reports, to inform control
enhancements and to devise ways to further reduce the risk of improper payments. For any
deficiencies identified, root causes are identified and corrective action plans established
and tracked to resolution.
Table 3 below summarizes FSA’s self-assessment on the status of its internal control over
payments for these programs.
Table 3. Status of Internal Controls
Internal Control Standards Pell Grant Direct Loan
Control Environment 4 4
Risk Assessment 4 4
Control Activities 3 3
Information and Communication 3 3
Monitoring 3 3
Legend:
4 = Sufficient controls are in place to prevent IPs
3 = Controls are in place to prevent IPs but there is room for improvement
2 = Minimal controls are in place to prevent IPs
1 = Controls are not in place to prevent IPs
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FSA leverages its OMB Circular A-123 Appendix A assessment to evaluate the design and
operating effectiveness of controls intended to prevent and detect improper payments. FSA
assesses these controls overall and by the internal control components identified below:
 Control Environment. FSA has a robust entity-level controls framework that provides
discipline and structure to help FSA achieve its objectives. Part of this framework is a
governance structure that includes an Improper Payment Working Group, a body of
accountable stakeholders that informs decisions related to improper payment
requirements, estimation, and control.
 Risk Assessment. FSA uses a risk assessment approach to target high-risk areas and
focus resources. FSA’s Office of Program Compliance, School Eligibility Service Group
performs annual risk assessments to inform decisions on where and how to target each
year’s program reviews. As a function of its A-123 program, FSA performs annual risk
assessment of business processes and systems, including Pell Grant and Direct Loan
payment processes, to determine where to focus control testing. FSA performs a
qualitative risk assessment at least once every three years to identify FSA programs
susceptible to significant improper payments.
 Control Activities. In FY 2016, FSA identified 328 controls related to improper
payments prevention or detection through its A-123A assessment. As an example, FSA
annually conducts approximately 250–300 Program Reviews of the approximately
6,000 eligible schools to assess institutions’ compliance with Title IV regulations.
 Information and Communication. FSA’s internal control framework supports quality
information management and communication. FSA has an incident reporting process to
collect information, such as high-dollar overpayment on a quarterly basis. FSA reports
an estimate of the annual amount and rate of improper payments for all programs and
activities susceptible to significant improper payments. In addition, FSA provides
guidance to third parties through Federal Register notices, Dear Colleague Letters, and
the Information for Financial Aid Professionals website, among others.
 Monitoring. FSA has a set of activities to monitor program performance, identify
instances of improper payments, and promptly resolve findings of audits and other
reviews related to improper payments. As an example, upon completion of Program
Reviews, FSA monitors appropriate corrective action and resolution of improper
payments.
As indicated above, the Department is committed to preventing improper payments with
front-end controls, and detecting and recovering them if they occur. The Department
continues efforts to: (1) assess the risk of improper payments, (2) estimate improper
payments, (3) address root causes of improper payments, and (4) recover improper
payments.
Accountability
FSA and other Department offices, managers, and staff are held accountable for meeting
applicable improper payments reduction targets and for establishing and maintaining
sufficient internal controls, including a control environment that prevents improper payments
from being made, and promptly detects and recovers any improper payments that may
occur. Offices and managers are held accountable through a variety of mechanisms and
controls, including annual performance measures aligned to the strategic plan,
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organizational performance review criteria, and individual annual performance appraisal
criteria.
Schools are responsible and held accountable for recipient verification for need-based aid.
FSA certifies a school’s eligibility for participation in Title IV programs, conducts periodic
Program Reviews of schools to verify compliance, and evaluates school financial statement
and compliance audits to ensure any potential compliance issues or control weaknesses
are resolved. Department and FSA contractors are held accountable through various
contract management and oversight activities and functions, control assessments, and
audits.
Agency Information Systems and Other Infrastructure
Audit Follow-up
The Department gathers and manages thousands of audits of grantees. Audit records are
managed and maintained in an Audit Accountability and Resolution Tracking System for
non-FSA-managed programs and an EZ Audit system for FSA-managed programs. Audits
are a key risk management tool, and the Department has demonstrated great success
working with grant recipients to resolve audit findings in a timely manner. Data from these
audit systems are analyzed to determine trends in audit findings and resolution, allowing
the Department to search for and better understand commonalities. This effort is assisting
the Department in reducing improper payments by strengthening audit resolution and
grants management.
Barriers
For FSA programs, the Department does not see significant barriers in taking corrective
action in reducing improper payments. A detailed discussion of program-specific barriers
can be found in the FY 2012 Report on the Department of Education’s Payment Recapture
Audits.
Recapture of Improper Payments Reporting
Agencies are required to conduct recovery audits for contract payments and programs that
expend $1 million or more annually if conducting such audits would be cost effective. The
Department performed a cost-benefit analysis and determined that a payment recapture
audit program would not be cost effective for FSA programs, other grant programs, and
contracts. OMB was notified on October 30, 2014, that it was not cost effective to conduct a
payment recapture audit and the programs/activities would be excluded from a payment
recapture audit program. OMB sent their concurrence to the Department on September 21,
2015. A comprehensive report on the cost effectiveness of the various recapture audit
programs can be found in the Department’s FY 2012 Report on the Department of
Education’s Payment Recapture Audits.
The Department identifies and recovers improper payments through sources other than
payment recapture audits. The Department works with grantees and Title IV (FSA) program
participants to resolve and recover amounts identified in compliance audits, OIG audits, and
Department-conducted program reviews as potential improper payments. Accounts
receivable are established for amounts determined to be due to the Department and
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collection actions are pursued. Payments can also be collected through offsets and other
means. Recipients of Department funds can appeal management’s decisions regarding
funds to be returned to the Department, thereby delaying or decreasing the amounts the
Department is able to collect.
In addition, for the Pell Grant program, recoveries also occur when overpayments to
students are assigned to FSA for collection. Pell Grant amounts recovered through student
debt collection were approximately $9.25 million in FY 2016, and $10.3 million in FY 2015.
While all programs may have student debts transferred to debt collection, the categorization
of resulting collections as an improper payment recovery is unique to the Pell Grant
program. Unlike loans, Pell Grant payments transferred to debt collection commonly indicate
a potential improper payment at time of disbursement.
The Department has not established formal recovery targets for contract payments given
the consistently insignificant findings. Since FY 2004, the Department’s audits have found
no improper payments for recovery, and there are no outstanding overpayments to report.
Should future contract payments be identified for recovery, the Department will establish
recovery targets, taking into consideration the nature of the overpayments and any potential
barriers to recovering funds.
Table 4, Improper Payment Recaptures without Audit Programs, below provides estimates of
the amounts identified and recovered through Compliance Audits, OIG Audits, and Program
Reviews for FY 2016.
Table 4. Overpayment Recaptures without Recapture Audit Programs(1)
(Dollars in Millions)
Overpayments Recaptured outside of Payment Recapture Audits
Program or Activity(2) Amount Amount
Identified Recaptured
All Department programs (including FSA) 118.71 20.35
TOTAL 118.71 20.35
(1) The Department’s cost-benefit analysis determined that a payment recapture audit program would not be
cost-effective for FSA programs, other grant programs, and contracts. As a result, OMB A-136 Guidance
Table 5, Disposition of Funds Recaptured Through Payment Recapture Audits, and Table 6, Aging of
Outstanding Overpayments Identified in the Payment Recapture Audits, have been omitted.
(2) The Department is unable to show the breakdown of amount identified and recaptured by program due to
system restraints. A system change was put in place during 2016 that will allow the Department to capture
the data by program for FY 2017.
Additional Comments
Continuous Monitoring and Data Analytics
The Department has a Continuous Controls Monitoring System to help detect improper
payments. This system applies a series of integrity checks to the Department’s grant (non-
FSA) payments and flags anomalous transactions for follow-up analysis. Examples of
issues that can be detected include duplicate or incorrect drawdowns and unusual refunds
and adjustments by grantees. The Department continues upgrading this system to expand
the transactions being evaluated, improve the relevance of the checks with improved
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algorithms, and integrate new sources of comparative data. A key objective of this initiative
is development of predictive modeling to prevent improper payments to the maximum
degree possible.
Risk Management
The Department took measures to prevent improper payments through the use of the
Decision Support System to run Entity Risk Review reports for non-FSA grant awards.
Using data drawn from the Department’s grants business system, the Federal Audit
Clearinghouse, the Institutes of Higher Education accreditation reporting, and Dun &
Bradstreet, this report identifies financial, programmatic, and controls risks posed by award
to the prospective grantee. Grant officers and awarding officials use the Entity Risk Review
reports in the preaward stage of the grant process to assess grantees’ risk and assist in the
determination of special conditions for grant awards. They also apply these reports in
devising monitoring plans for the life of the grant, strengthening them as the Department’s
first line of defense against improper payments by grantees.
In FY 2016, 100 percent of Department’s discretionary grants awards were assessed for
risk prior to award in the areas of: financial stability; adequacy of management systems to
meet applicable standards; performance history; and compliance with applicable laws and
regulations, including those related to Suspension and Debarment. This work successfully
demonstrated the Department’s early compliance with 2 C.F.R. Section 205, Federal
Awarding Agency Review of Risk Posed by Applicants.
Payment Integrity Workgroup
The Department has an internal workgroup intended to demonstrate payment integrity as
opposed to being focused solely on improper payments. The workgroup includes
representatives from different offices that are working collaboratively to evaluate the
Department’s framework for assessing the risk of improper payments and for strengthening
the controls on estimating, preventing, detecting, and recovering improper payments. The
workgroup is intended to identify, categorize, assess, and improve controls, as well as to
train staff on their responsibilities with respect to ensuring the integrity of Department
payments.
The Department also participates in the Improper Payments Federal Community of Practice
group organized by the Social Security Administration. The workgroup is focused on the
prevention of improper payments and sharing best practices between federal agencies. The
group’s vision is to increase interagency relationships, collaboration, and cooperation;
share ideas and best practices to map knowledge and find solutions; and use the combined
leadership to foster innovation.
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IMPROPER PAYMENTS REPORTING DETAILS
Agency Reduction of Improper Payments with the Do Not Pay
Initiative
Table 7. Results of the Do Not Pay Initiative in Preventing Improper Payments
(Dollars in Millions)
Number (#) Number (#) of Dollars ($) of
Dollars ($) of
of potential potential
payments Number (#) Dollars ($)
payments improper improper
reviewed for of of
reviewed payments payments
possible payments payments
for possible reviewed and reviewed and
improper stopped stopped
improper determined determined
payments
payments accurate(3) accurate
Reviews with 1,357,920 187,815.45 0 0 851 .247781
the IPERIA
specified
databases(1)
Reviews with 168,787 1,564.60 0 0 171 .505709
databases
not listed in
IPERIA(2)
(1) IPERIA databases used for payment screening include the Death Master File and the System for Award
Management. Data for the period October 1, 2015, to September 30, 2016.
(2) Reviews with databases not listed in IPERIA include payments reviewed through the Department’s
Continuous Controls Monitoring System (CCMS). This system applies a series of integrity checks to the
Department’s grant (non-FSA) payments and flags anomalous transactions for follow-up analysis. Examples of
issues that can be detected include duplicate or incorrect drawdowns and unusual refunds and adjustments by
grantees. The Department continues upgrading this system to expand the transactions being evaluated,
improve the relevance of the checks with improved algorithms, and integrate new sources of comparative data.
A key objective of this initiative is development of predictive modeling to prevent improper payments to the
maximum degree possible. Data for the period October 1, 2015, to September 30, 2016.
(3) Payments requiring further review and identified as proper.
The Department continues its efforts to prevent and detect improper payments via the DNP
Business Center portal as required by IPERIA. During FY 2016, 1,357,920 payments,
totaling $187.8 billion, were reviewed for possible improper payments through the DNP
portal. A total of 851 payments, totaling $247,781, were further reviewed and determined to
be accurate. The Department validated that potential improper payments identified were
adjudicated and reported to Treasury in a timely manner. The Department also reviewed
168,787 payment refunds, totaling $1.6 billion, for potential improper payments through the
Continuous Controls Monitoring System. A total of 212 transactions were further reviewed
for potential improper payments and 171 transactions, totaling $505,709, were determined
to be accurate.
The Department is also looking at ways to partner with the Treasury Department’s DNP
Business Center to enhance data analytics capabilities, reduce gaps, and improve
processes to ensure payments are proper.
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Combined Schedule of Spending
The Schedule of Spending (SOS) presents: (a) what money was available to the
Department to spend, (b) how the money was spent, and (c) who the money went to. For
information on spending, USAspending.gov is a searchable website that provides
information on federal awards and is accessible to the public at no cost.
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COMBINED SCHEDULE OF SPENDING
United States Department of Education
Combined Schedule of Spending
For the Years Ended September 30, 2016 and 2015
(Dollars in Millions)
FY 2016 FY 2015
Non-Budgetary Non-Budgetary
Credit Reform Credit Reform
Financing Financing
Budgetary Accounts Budgetary Accounts
Section I: What Money Is Available to Spend?
This section presents resources that were available to spend by the Department.
Total Resources $ 103,245 $ 231,821 $ 117,218 $ 232,460
Amount Available but Not Agreed to be Spent (10,280) - (11,806) (550)
Amount Not Available to be Spent (2,163) (15,479) (2,968) (13,887)
Total Amounts Agreed to be Spent $ 90,802 $ 216,342 $ 102,444 $ 218,023
Section II: How Was the Money Spent?
This section presents services and items purchased, is grouped by major program, and is based on outlays.
Increase College Access, Quality, and Completion
Credit Program Loan Disbursements and Claim Payments $ 12,608 $ 196,012 $ 25,249 $ 198,431
Grants 33,880 - 35,569 -
Personnel Compensation and Benefits 291 - 273 -
Contractual Services 1,351 775 1,248 1,065
Other 1/ 36 - 37 -
Total Program Spending 47,626 196,787 62,376 199,496
Improve Preparation for College and Career from Birth
Through 12th Grade, Especially for Children with High Needs
Grants 21,523 - 22,322 -
Personnel Compensation and Benefits 74 - 73 -
Contractual Services 87 - 106 -
Other 1/ 13 - 15 -
Total Program Spending 21,697 - 22,516 -
Ensure Effective Educational Opportunities for All Students
Grants 16,691 - 16,474 -
Personnel Compensation and Benefits 151 - 148 -
Contractual Services 43 - 49 -
Other 1/ 23 - 23 -
Total Program Spending 16,908 - 16,694 -
Enhance the Education System’s Ability to Continuously Improve
Grants 1,659 - 1,661 -
Personnel Compensation and Benefits 94 - 94 -
Contractual Services 451 - 491 -
Other 1/ 17 - 15 -
Total Program Spending 2,221 - 2,261 -
Total Spending $ 88,452 $ 196,787 $ 103,847 $ 199,496
Amounts Remaining to be Spent2/ 2,350 19,555 (1,403) 18,527
Total Amounts Agreed to be Spent $ 90,802 $ 216,342 $ 102,444 $ 218,023
Section III: Who Did the Money Go To?
This section identifies with whom the Department is spending money based on obligations incurred.
Nonfederal Obligations $ 90,323 $ 216,341 $ 101,977 $ 218,023
Federal Obligations 479 1 467 -
Total Amounts Agreed to be Spent $ 90,802 $ 216,342 $ 102,444 $ 218,023
1/
Other primarily consists of payments for rent, utilities, communication, travel, and transportation.
2/
The “Amounts Remaining to be Spent” line is the difference between “Total Spending” and “Total Amounts Agreed to be Spent.” Actual spending in the current FY may include spending
associated with amounts that are agreed to be spent during previous FYs, which may result in negative amounts shown for the “Amounts Remaining to be Spent” line.
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COMBINED SCHEDULE OF SPENDING
The combined SOS presents an overview of how and where the Department spent its
funding. The budgetary information in this schedule is presented on a combined basis and
not a consolidated basis.
 The “what money is available to spend” section summarizes the resources that were
available to spend during the fiscal year.
 The “how was the money spent” section summarizes the Department’s outlays for the
fiscal year, categorized by the OMB budget object class definitions found in Circular
A-11, “Preparation, Submission and Execution of the Budget,” and by payment types.
 The “who did the money go to” section summarizes the Department’s obligations by
federal and nonfederal components.
 The “total amount agreed to be spent” in each section is equal to the new obligations
and upward adjustments shown on the combined statement of budgetary resources.
Similar data are also submitted to USAspending.gov; however, the amounts will not
reconcile primarily because reporting requirements differ, particularly for loan programs
and for payroll and employee benefits.
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Summary of Financial Statement Audit and Management
Assurances
The following tables provide a summarized report on the Department’s financial statement
audit and its management assurances. For more details, the auditor’s report can be found
beginning on page 92 and the Department’s management assurances on pages 30–40.
Summary of Financial Statement Audit
Audit Opinion: Unmodified
Restatement: No
Beginning Ending
Material Weaknesses New Resolved Consolidated
Balance Balance
Total Material Weaknesses 0 0 0 0 0
Summary of Management Assurances
Effectiveness of Internal Control over Financial Reporting—Federal Managers’ Financial Integrity Act
(FMFIA) 2
Statement of Assurance: Unmodified
Beginning Ending
Material Weaknesses New Resolved Consolidated Reassessed
Balance Balance
Total Material Weaknesses 0 0 0 0 0 0
The Department had no material weaknesses in the design or operation of the internal control over financial
reporting.
Effectiveness of Internal Control over Operations—FMFIA 2
Statement of Assurance: Unmodified
Beginning Ending
Material Weaknesses New Resolved Consolidated Reassessed
Balance Balance
Total Material Weaknesses 0 0 0 0 0 0
Conformance with Financial Management System Requirements—FMFIA 4
Statement of Assurance: The Department systems conform to financial management system requirements.
Beginning Ending
Nonconformances New Resolved Consolidated Reassessed
Balance Balance
Total Nonconformances 0 0 0 0 0 0
Compliance with Federal Financial Management Improvement Act (FFMIA)
Agency Auditor
No lack of compliance No lack of compliance
1. System Requirements
noted noted
No lack of compliance No lack of compliance
2. Federal Accounting Standards
noted noted
3. United States Standard General No lack of compliance No lack of compliance
Ledger at Transaction Level noted noted
FY 2016 Agency Financial Report—U.S. Department of Education 135
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MEMORANDUM FROM THE OFFICE OF INSPECTOR GENERAL
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Office of Inspector General’s (OIG) Management and
Performance Challenges for Fiscal Year 2017
Executive Summary
The Office of Inspector General (OIG) works to promote efficiency, effectiveness, and
integrity in the programs and operations of the U.S. Department of Education (Department).
Through our audits, inspections, investigations, and other reviews, we continue to identify
areas of concern within the Department’s programs and operations and recommend actions
the Department should take to address these weaknesses. The Reports Consolidation Act
of 2000 requires the OIG to identify and report annually on the most serious management
challenges the Department faces. The Government Performance and Results
Modernization Act of 2010 requires the Department to include in its agency performance
plan information on its planned actions, including performance goals, indicators, and
milestones, to address these challenges.
Last year, we presented five management challenges: improper payments, information
technology security, oversight and monitoring, data quality and reporting, and information
technology system development and implementation. On September 22, 2016, the Office of
the Deputy Secretary announced an initiative to review the identified management
challenges, assigned senior managers to be accountable for each, and assembled a
workgroup of other senior managers throughout the Department to address the noted
challenges. The Department further noted that this effort is intended to help identifying
systemic root causes and ensure that Department’s actions are impactful and produce
results. We consider this initiative to be a positive step towards addressing long-standing
management challenges and encourage the Department to continue to explore approaches
that result in targeted focus within each of these areas. Although the Department made
some progress in addressing these areas, each remains as a management challenge for
fiscal year (FY) 2017.
The FY 2017 management challenges are:
(1) Improper Payments,
(2) Information Technology Security,
(3) Oversight and Monitoring,
(4) Data Quality and Reporting, and
(5) Information Technology System Development and Implementation.
These challenges reflect continuing vulnerabilities and emerging issues faced by the
Department as identified through recent OIG audit, inspection, and investigative work. A
summary of each management challenge area follows. This FY 2017 Management
Challenges Report is available at http://www2.ed.gov/about/offices/list/oig/
managementchallenges.html.
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OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2017
Management Challenge 1—Improper Payments
Why This Is a Challenge
The Department must be able to ensure that the billions of dollars entrusted to it are
reaching the intended recipients. The Department identified the Federal Pell Grant and the
William D. Ford Federal Direct Loan (Direct Loan) programs as susceptible to significant
improper payments. In addition, the Office of Management and Budget (OMB) has
designated these programs as high-priority programs, which are subject to greater levels of
oversight.
Our recent work has demonstrated that the Department remains challenged to meet
required improper payment reduction targets and to intensify its efforts to successfully
prevent and identify improper payments. We have identified concerns in numerous areas
relating to improper payments, including the completeness, accuracy, and reliability of
improper payment estimates and methodologies.
In May 2016, we reported that the Department’s published improper payment estimates for
both the Pell Grant and Direct Loan programs were inaccurate and unreliable because they
used incorrect formulas in performing calculations and deviated from OMB-approved
methodologies. We concluded that the Department did not comply with IPERA because it
did not meet the annual reduction target for the Direct Loan program. The Department’s
recalculated FY 2015 improper payment rate (2.63 percent) for the Direct Loan program to
correct for formula execution errors we identified did not meet its reduction target
(1.49 percent).
Our semiannual reports to Congress from April 1, 2013, through March 31, 2016, included
more than $2.3 million in questioned or unsupported costs from audit reports and more than
$59 million in restitution payments from our investigative activity.
Progress in Meeting the Challenge
The Department stated that it had developed internal controls that are intended to prevent,
detect, and recover improper payments. The Department stated that it strives to provide
timely and accurate payments to grant recipients and students while ensuring that the
related controls are not too costly or burdensome to fund recipients. The Department further
noted that it also relies on controls established by fund recipients who make payments on
behalf of the Department.
In response to OIG recommendations, the Department stated that it developed and
implemented corrective actions to improve the accuracy and completeness of its 2016
improper payment estimates. This included the establishment of a working group with OIG
and OMB participation to review changes to the Department’s alternative improper payment
estimation methodology to resolve identified risks. The Department also convened a senior
level working group to identify and evaluate estimation methodology options for 2017 that
would ensure IPERA compliance going forward. The Department added that it had revised
its 2016 estimation methodology to decrease the volatility of the estimate and to address
the other issues noted by the OIG.
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The Department reported that it continues to assess and enhance its controls over student
aid payments. The Department stated that it routinely analyzes application and payment
data and considers other factors, such as program reviews and audit reports, to inform
control enhancements and to devise ways to further reduce the risk of improper payments.
The Department added that it has implemented an internal control framework intended to
prevent or detect improper payments and has established processes to annually assess the
design and operating effectiveness of these controls. The Department also stated that when
weaknesses are identified, it identifies root causes and establishes corrective action plans.
What Needs to Be Done
The Department’s efforts to revise its estimation methodology are a good step forward to
better identifying improper payments, so that corrective actions can be developed and
tracked. The OIG will continue to review the Department’s efforts, with a focus on assessing
how the new methodology is functioning to identify potential sources of improper payments.
Ultimately, the ability of the Department to address this management challenge hinges on
its ability to identify root causes, develop corrective actions, and demonstrate that its efforts
have resulted in reductions in improper payments. While the Department correctly
acknowledges that it relies on the internal controls of fund recipients who make payments
on behalf of the Department, it is important that the Department’s efforts to reduce improper
payments includes processes to identify high-risk recipients and ensure that those
recipients have effective systems of internal control.
Management Challenge 2—Information Technology Security
Why This Is a Challenge
The OIG has identified repeated problems in information technology (IT) security and noted
increasing threats and vulnerabilities to Department systems and data. Department
systems contain or protect an enormous amount of sensitive information, such as personal
records, financial information, and other personally identifiable information. Without
adequate management, operational, and technical security controls in place, the
Department’s systems and information are vulnerable to attacks. Unauthorized access
could result in losing data confidentiality and integrity, limiting system availability, and
reducing system reliability.
Over the last several years, IT security audits have identified controls that need
improvement to adequately protect the Department’s systems and data. This included
weaknesses in configuration management, identity and access management, incident
response and reporting, risk management, remote access management, and contingency
planning.
Progress in Meeting the Challenge
The Department stated that it has taken a number of steps to strengthen the cybersecurity
posture of the Department’s networks and systems over the past fiscal year, including:
 Working to identify and protect high value information and assets that resulted in a
better understanding of the potential impact from a cyber incident and helped to ensure
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OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2017
that physical and cybersecurity protections were in place for the Department’s high
value assets.
 Strengthening its capability to respond to cybersecurity incidents and identifying a plan
for future action to establish a mature incident response capability.
 Establishing daily integrated Security Operations Center calls to communicate events or
requirements with all necessary stakeholders.
 Deploying enhanced capabilities for the detection of cyber vulnerabilities and protection
from cyber threats.
 Strengthening its partnership with the Department of Homeland Security to accelerate
the deployment of continuous diagnostics and mitigation capabilities.
The Department expected that recent actions would sustain and improve the advances
seen over the past fiscal year. The Department stated that it had completed a significant
step toward improving overall cybersecurity by requiring all privileged users use hardware-
based Personal Identity Verification cards or alternative forms of strong authentication. The
Department added that other significant activities included leveraging existing capabilities to
perform independent verification and validation of contractor submitted data, reviewing
contractual requirements and assessments for contractor abilities to provide infrastructure
services and malware detection, continuing employee awareness training, and developing
IT security staff skills and competencies.
What Needs to Be Done
The Department reported significant progress towards addressing long-standing IT security
weaknesses in the past fiscal year. However, we continue to identify significant
weaknesses in our annual FISMA audits despite the Department’s reported corrective
actions to address our prior recommendations. While we commend the Department for
placing a priority on addressing these weaknesses, it needs to continue its efforts to
develop and implement an effective system of IT security controls. Our FISMA audits will
continue to assess the Department’s efforts and this will remain a management challenge
until our work corroborates that the Department’s system of controls achieves expected
outcomes.
Management Challenge 3—Oversight and Monitoring
Effective oversight and monitoring of the Department’s programs and operations are critical
to ensure that funds are used for the purposes intended and programs are achieving goals
and objectives. This is a significant responsibility for the Department given the numbers of
different entities and programs requiring monitoring and oversight, the amount of funding
that flows through the Department, and the impact that ineffective monitoring could have on
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stakeholders. Two subareas are included in this management challenge—Student Financial
Assistance (SFA) program participants and grantees.1
Oversight and Monitoring—SFA Program Participants
Why This Is a Challenge
The Department must provide effective oversight and monitoring of participants in the SFA
programs under Title IV of the Higher Education Act of 1965, as amended, to ensure that
the programs are not subject to fraud, waste, and abuse. The Department’s FY 2017
budget request includes 139.7 billion in new grants, loans, and work study assistance to
help an estimated 12.1 million students and their families pay for college.
The growth of distance education has added to the complexity of the Department’s
oversight of SFA program participants. The management of distance education programs
presents challenges to the Department and school officials because little or no in-person
interaction between the school officials and the student presents difficulties in verifying the
student’s identity and academic attendance. The overall growth and oversight challenges
associated with distance learning increases the risk of school noncompliance with the
federal student aid laws and regulations and creates new opportunities for fraud, abuse,
and waste in the SFA programs. Our investigative work has identified numerous instances
of fraud involving the exploitation of vulnerabilities in distance education programs to obtain
federal student aid.
Our audits and inspections, along with work conducted by the Government Accountability
Office continue to identify weaknesses in FSA’s oversight and monitoring of SFA program
participants. Our audits of individual SFA program participants frequently identified
noncompliance and waste and abuse of SFA program funds.
Progress in Meeting the Challenge
Overall, the Department reported that FSA remains committed to use more innovative and
efficient methods to bolster its oversight and compliance efforts. This included efforts
intended to expand the Department’s ability to perform these activities in a more proactive
and preemptive fashion. The Department reported that it focused on three priority areas in
its efforts to improve the oversight and monitoring of SFA program participants during
FY 2016; (1) bolstering capacity to provide adequate Title IV enforcement; (2) enhancing
oversight of contracts, loan servicing activities, and schools; and (3) expanding Clery Act
and borrower defense work.
As part of this effort, the Department created the Enforcement Office within FSA to respond
more quickly and efficiently to allegations of illegal actions by higher education institutions.
1 This area includes two changes from our previous Management Challenges report. In FY 2016 we
included Distance Education as a distinct management challenge; however it is included as an
element of Oversight and Monitoring – SFA Program Participants in this report. The change was
made after consideration of the Department’s feedback to our prior report. Our FY 2016 report also
included Oversight and Monitoring – Contractors as a subpart to this section. That element was
removed because our current body work does not support its continued reporting as a challenge to
the Department.
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FSA also noted accomplishments in enhancing its oversight activities made by its
multiregional review team, Program Compliance unit, and Clery team.
With respect to the challenges presented by distance education, the Department stated that
FSA’s Program Compliance unit enhanced the Recipient Data Sheet that is used to
determine which students are receiving a portion or all of their education via distance
education. The Department added that in FY 2016, Program Compliance developed and
delivered a training program for program reviewers on the process to evaluate distance
education. The training program included three components: a lecture on distance
education requirements, case studies, and a question-answer session. In addition, a
recommended work tool was created to assist reviewers in evaluating distance education
courses. The Department believed that enhanced outcomes were evidenced in subsequent
reviews of distance education programs. FSA plans to conduct continuous training to
current and new reviewers to reinforce distance education review requirements and plans
to monitor program reviews for distance education outcomes. The Program Compliance
team also plans to work with other parts of FSA to offer training to institutions on distance
education requirements through conference sessions, webinars, and other trainings.
What Needs to Be Done
The Department identified several important accomplishments that are intended to
collectively improve its ability to provide effective oversight. We recognize the progress
being made and the need to balance controls with both cost and the ability to provide
necessary services effectively. However, our audits and investigations involving FSA
programs continue to identify numerous instances of noncompliance and fraud.
Overall, the Department needs to ensure that the activities of its Program Compliance office
result in effective processes to monitor FSA program participants and reduce risk. It also
should work to ensure that its program review processes are designed and implemented to
effectively verify that high-risk schools meet requirements for institutional eligibility, financial
responsibility, and administrative capability. The Department further needs to ensure that
development and implementation of its Enforcement Office effectively provides the intended
additional protections to students and taxpayers. Finally, the Department could enhance its
oversight of FSA programs by developing and implementing improved methods to prevent
and detect fraud. This includes methods to limit the effectiveness of organized activities
involving distance fraud rings.
Oversight and Monitoring—Grantees
Why This Is a Challenge
Effective monitoring and oversight are essential for ensuring that grantees meet grant
requirements and achieve program goals and objectives. The Department’s early learning,
elementary, and secondary education programs annually serve nearly 18,200 public school
districts and 50 million students attending more than 98,000 public schools and
32,000 private schools. Key programs administered by the Department include Title I of the
Elementary and Secondary Education Act, which under the President’s 2017 request would
deliver $15.4 billion to help more than 24 million students in high-poverty schools make
progress toward State academic standards. Another key program is the Individuals with
Disabilities Education Act, Part B Grants to States, which would provide about $11.9 billion
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to help States and school districts meet the special educational needs of 6.7 million
students with disabilities.
OIG work has identified a number of weaknesses in grantee oversight and monitoring.
These involve local educational agency (LEA) fiscal control issues, State educational
agency (SEA) control issues, fraud perpetrated by LEA and charter school officials, and
internal control weaknesses in the Department’s oversight processes.
Progress in Meeting the Challenge
To further improve monitoring and promote effective grant oversight, the Department has
issued guidance to offices that manage formula and discretionary grant programs, provided
training for staff, and engaged in technical assistance to both staff and external
stakeholders to enhance business operations in the area of grant award monitoring and
oversight. In addition, some program offices have piloted new processes to improve
coverage, efficiency, and consistency in fiscal monitoring across programs.
What Needs to Be Done
The Department’s issuance of new grant management guidance to its program offices
should provide an improved basis for their monitoring activities. However, the Department
still needs to ensure that its program offices are consistently providing effective risk-based
oversight of grant recipients across applicable federal education programs. We
acknowledge that the Department has worked to enhance the knowledge and capabilities
of its existing employees. However, given the Department’s generally limited staffing in
relation to the amount of federal funding it oversees, it is important for the Department to
explore ways to more effectively leverage the resources of other entities that have roles in
grantee oversight. This could include methods to use the single audit process and updates
to the OMB 2 CFR 200, Subpart F—Compliance Supplement as ways to improve its
monitoring efforts and help mitigate fraud and abuse in its programs.
Management Challenge 4—Data Quality and Reporting
Why This Is a Challenge
The Department, its grantees, and its subrecipients must have effective controls to ensure
that reported data are accurate and reliable. The Department uses data to make certain
funding decisions, evaluate program performance, and support a number of management
decisions. Our work has identified a variety of weaknesses in the quality of reported data
and recommended improvements at the Department, SEA, and LEA level. This included
weaknesses in controls over the accuracy and reliability of program performance and
academic assessment data.
Progress in Meeting the Challenge
The Department stated that it continues to work to promote SEA controls over data,
improve its own controls over data submitted by grantees, and ensure the transparency of
data quality. The Department’s efforts to improve the data that it collects, publishes, and
uses to inform grant management are coordinated by senior officials who are members of
the Department’s Data Strategy Team and the EDFacts Governing Board. The Department
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also reported that in the past year it had taken steps to promote grantee awareness of data
quality issues and strengthen its review of grantee data.
The Department further stated that it has multiple initiatives underway to improve data
quality and help strengthen the accuracy and reliability of data reported by the Department.
These included (1) strengthening the procedures for tracking issues with grantee data,
(2) communicating the importance of grantee internal controls over data quality in
monitoring, (3) strengthening the language in the certifications that grantees sign when
submitting data to the Department, (4) improving the process for following up and resolving
questions about grantee data submitted to EDFacts, and (5) supporting State agencies in
improving their own data quality procedures.
The Department added that it continues to include information about data limitations when
reporting data in the Annual Performance Report and other publications and was
implementing a corrective action plan in response to the OIG’s recommendation that the
Department improve its data quality through monitoring efforts.
What Needs to Be Done
The Department continues to complete significant work that is intended to improve the
overall quality of data that it collects and reports. This work should remain a priority, as data
quality contributes to effective program management and helps ensure the credibility of
information published by the Department. While the Department has made progress in
strengthening both grantees’ data quality processes and its own internal reviews of grantee
data, this area is an ongoing challenge.
Our recent audits have found weaknesses in grantees’ internal controls over the accuracy
and reliability of program performance data and student testing data. Overall, the
Department needs to ensure that it is providing effective oversight and monitoring to
grantees regarding their controls over data quality. Of note, the Department’s efforts to
strengthen its procedures for tracking issues with grantee data could serve as a basis for
sharing information across its program offices and identify entities for enhanced monitoring
and support. The Department should also continue its efforts to provide appropriate
technical assistance to grantees as necessary. Overall, the Department must continue to
work to implement effective controls at all applicable levels to of the data collection and
review processes to ensure that accurate and reliable data are reported.
Management Challenge 5—Information Technology System
Development and Implementation
Why This Is a Challenge
The President’s budget for FY 2017 stated that ensuring the efficiency, effectiveness, and
security of federal IT has never been more central to how Americans are served by their
government. It further notes that the current administration has focused on driving
efficiencies in the way the government buys, builds, and delivers IT solutions to provide
improved services to citizens. It adds that with the ongoing evolution of technology, the
federal government has an unprecedented opportunity to accelerate the quality and
timeliness of services delivered to the American people.
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The Department faces an ongoing challenge of efficiently providing services to growing
numbers of program participants and managing additional administrative requirements with
declining staffing levels. The Department reported that it has the smallest staff but the third-
largest discretionary budget among the 15 Cabinet agencies. The Department further
reported that between 2005 and 2015 it experienced a 6 percent decrease in full-time
equivalent usage. This makes effective information systems development and
implementation and the greater efficiencies such investments can provide critical to the
success of the Department’s activities and the achievement of its mission.
The Department’s current IT investments include systems that support business processes
such as student application processing and eligibility determination for federal student
financial assistance; grant and loan award processing; procurement and acquisition; and
the collection, storage, and reporting on Title IV aid disbursements and aid recipients.
According to data from the Federal IT Dashboard, the Department’s total IT spending for
FY 2015 was $689 million, with FSA’s IT spending accounting for more than $458 million of
the total.
Our recent work has identified weaknesses in the Department’s processes to oversee and
monitor systems development that have negatively impacted operations and may have
resulted in improper payments.
Progress in Meeting the Challenge
The Department reported that it had made progress in the overall program management
and oversight of IT systems. This included developing a Lifecycle Management
Methodology at FSA, conducting Independent Validation and Verification of a high risk
system, and establishing a formal contract monitoring plan. The Department stated that it
planned to continue its progress within this area by further educating project owners of
lifecycle processes, enhancing program management oversight capabilities, and providing
additional guidance to new IT system contracts.
In addition, the Department stated that it continues to execute its Federal Information
Technology Acquisition Reform Act (FITARA) implementation plan and at the time of this
report was on track to meet internal CIO and external OMB commitments in the FITARA
areas of budget formulation and planning, acquisition planning, acquisition execution, and
organization and workforce. The Department reported that of the 44 baseline tasks,
33 have been completed and 11 are in progress and scheduled for completion by
December 31, 2016. Finally the Department stated that its FITARA working group continues
to meet and address challenges that include improving planning and execution processes.
What Needs to Be Done
The Department needs to continue to monitor contractor performance to ensure that system
deficiencies are corrected and that system performance fully supports the Department’s
financial reporting and operations. The Department further needs to enhance its
management and oversight of system modifications and enhancements and ensure that
appropriate expertise to manage system contracts is in place. While Lifecycle Management
Methodology was established in FSA, management needs to ensure it is implemented and
followed.
FY 2016 Agency Financial Report—U.S. Department of Education 145
OTHER INFORMATION
OFFICE OF INSPECTOR GENERAL’S MANAGEMENT CHALLENGES FOR FY 2017
Looking forward, the Department also needs to continue implementing the requirements of
the Federal Information Technology Acquisition Reform Act and the revised OMB Circular
A-130, “Managing Information as a Strategic Resource.”
146 FY 2016 Agency Financial Report—U.S. Department of Education
OTHER INFORMATION
Freeze the Footprint
This effort strives to bring a new approach to the workplace at the Department, by building
greater employee performance and productivity through innovative space designs and
technology enhancements, while reducing the agency’s space footprint and associated out-
year costs. The project will also allow the agency to meet the new federal space guidelines
(150–180 usable square footage/person vs. the current usable square footage of 338).
The Department Challenges are:
 Limited IT tools to support new mobile workforce
 IT infrastructure is outdated
 In some cases, telework expansion has outpaced space designs
 Agency employee recruitment efforts restricted to a limited number of states, limiting the
size of the mobile workforce
The Department Strategy is to:
 Upgrade the IT infrastructure
 Provide mobile workers with 21st century tools
 Strengthen the Performance Management Program
 Promote cultural acceptance of a mobile workforce
 Design innovative work spaces
 Implement an Electronic Records Management System
 Reduce the space footprint
Freeze the Footprint Baseline Comparison
FY 2012 Change (FY 2012
2015
Baseline Baseline–2015)
Square
1,563,641 1,548,425 15,216
Footage
The square footage totals are for the office and warehouse domestic assets, which are
assets located in the 50 states, Washington, DC, and United States territories. The square
footage total includes owned and leased assets. Updated square footage information is
posted on the performance.gov website.
FY 2016 Agency Financial Report—U.S. Department of Education 147
OTHER INFORMATION
Civil Monetary Penalty Adjustment for Inflation
The Federal Civil Penalties Inflation Adjustment Act of 1990, as amended, requires
agencies to make regular and consistent inflationary adjustments of civil monetary penalties
to maintain their deterrent effect. To improve compliance with the act, and in response to
multiple audits and recommendations, agencies should report annually in the Other
Information section the most recent inflationary adjustments to civil monetary penalties to
ensure penalty adjustments are both timely and accurate.
Penalty Authority Date of Previous Date of Current Current Penalty
Adjustment Adjustment Level
Failure to 20 USC October 2, 2012 August 1, 2016 $36,256
provide 1015(c)(5)
information for
cost of higher
education
Failure to 20 USC October 2, 2012 August 1, 2016 $30,200
provide 1022d(a)(3)
information
regarding
teacher-
preparation
programs
Violation of 20 USC 1082(g) October 2, 2012 August 1, 2016 $53,907
Title IV of the
HEA
Violation of 20 USC October 2, 2012 August 1, 2016 $53,907
Title IV of the 1094(c)(3)(B)
HEA
Failure to 20 USC October 2, 2012 August 1, 2016 $1,591
disclose 1228c(c)(2)(E)
information to
minor children
and parents
Improper 31 USC 1352 October 2, 2012 August 1, 2016 $18,936 to $189,261
lobbying for (c)(1)
government
grants and
contracts
False claims 31 USC October 2, 2012 August 1, 2016 $10,781
and 3802(a)(1)
statements
148 FY 2016 Agency Financial Report—U.S. Department of Education
Appendices
Appendices
APPENDICES
Appendix A: Selected Department Web Links and Education
Resources
College Completion Toolkit
The College Completion Toolkit provides information that governors and other state leaders
can use to help colleges in their state increase student completion rates. It highlights key
strategies and offers models to learn from, as well as other useful resources.
http://www.ed.gov/sites/default/files/cc-toolkit.pdf
College Cost Lists
The Department provides college affordability and transparency lists under the Higher
Education Opportunity Act of 2008. Each list is broken out into nine different sectors to
allow students to compare costs at similar types of institutions, including career and
technical programs. http://collegecost.ed.gov/catc/
College Navigator
College Navigator consists primarily of the latest data from the Integrated Postsecondary
Education Data System, the core postsecondary education data collection program for the
National Center for Education Statistics. http://nces.ed.gov/collegenavigator/
College Preparation Checklist
This Departmental tool gives prospective college students step-by-step instructions on how
to prepare academically and financially for education beyond high school. Each section is
split into subsections for students and parents, explaining what needs to be done and which
publications or websites might be useful to them. http://studentaid.ed.gov
Additional resources within the checklist assist students in finding scholarships and grants.
http://studentaid.ed.gov/students/publications/checklist/main.html
https://studentaid.ed.gov/sa/types/grants-scholarships/finding-scholarships
College Scorecards
College Scorecards in the Department’s College Affordability and Transparency Center
make it easier to find out more about a college’s affordability and value. The College
Scorecard has been redesigned as a tool that further commits to the administration’s Open
Data Initiative and incorporates direct input from students, families, and their advisers to
provide the clearest, most accessible, and most reliable national data on college cost,
graduation, debt, and postcollege earnings. The old way of assessing college choices relied
on static ratings lists compiled by someone who was deciding what value to place on
different factors. The new way of assessing college choices, with the help of technology
and open data, makes it possible for anyone—a student, a school, a policymaker, or a
researcher—to decide which factors to evaluate. https://collegescorecard.ed.gov/
150 FY 2016 Agency Financial Report—U.S. Department of Education
APPENDICES
SELECTED DEPARTMENT W EB LINKS AND EDUCATION RESOURCES
Condition of Education and Digest of Education Statistics
The Condition of Education is a congressionally mandated annual report that summarizes
developments and trends in education using the latest available statistics. The report
presents statistical indicators containing text, figures, and data from early learning through
graduate-level education. http://nces.ed.gov/programs/coe/
The primary purpose of the Digest of Education Statistics is to provide a compilation of
statistical information covering the broad field of American education from prekindergarten
through graduate school. The Digest includes a selection of data from many sources, both
government and private, and draws especially on the results of surveys and activities
carried out by the National Center for Education Statistics.
http://nces.ed.gov/programs/digest/
Government Accountability Office
The Government Accountability Office supports Congress in meeting its constitutional
responsibilities and helps improve the performance and accountability of the federal
government for the benefit of the American people.
http://www.gao.gov/docsearch/agency.php
Grants Information and Resources
In addition to student loans and grants, the Department offers other discretionary grants.
These are awarded using a competitive process, and formula grants use formulas
determined by Congress with no application process. This site lists Department
discretionary grant competitions previously announced, as well as those planned for later
announcement, for new awards organized according to the Department’s principal program
offices. http://www2.ed.gov/fund/grant/find/edlite-forecast.html
For more information on the Department’s programs, see http://www2.ed.gov/programs.
National Assessment of Educational Progress
The National Assessment of Educational Progress assesses samples of students in grades
4, 8, and 12 in various academic subjects. Results of the assessments are reported for the
nation and states in terms of achievement levels—Basic, Proficient, and Advanced.
http://nces.ed.gov/nationsreportcard/
Office of Inspector General
The Office of Inspector General conducts independent and objective audits, investigations,
inspections, and other activities to promote the efficiency, effectiveness, and integrity of the
Department’s programs and operations. http://www.ed.gov/about/offices/list/oig/index.html
For a list of recent reports, go to http://www2.ed.gov/about/offices/list/oig/reports.html.
FY 2016 Agency Financial Report—U.S. Department of Education 151
APPENDICES
SELECTED DEPARTMENT W EB LINKS AND EDUCATION RESOURCES
One-Stop Shopping for Student Loans
The Department provides a site from which students can manage their loans.
http://studentloans.gov/
Open Government Initiative
The Department’s Open Government Initiative is designed to improve the way the
Department shares information, learns from others, and collaborates to develop the best
solutions for America’s students. http://www2.ed.gov/about/open.html
Performance Data
EDFacts is a Department initiative to put performance data at the center of policy,
management, and budget decisions for all K–12 educational programs. EDFacts centralizes
performance data supplied by K–12 state educational agencies with other data assets, such
as financial grant information, within the Department to enable better analysis and use in
policy development, planning, and management.
http://www.ed.gov/about/inits/ed/edfacts/index.html
Practice Guides for Educators
The Department offers guides that help educators address everyday challenges faced in
classrooms and schools. Developed by a panel of nationally recognized experts, practice
guides consist of actionable recommendations, strategies for overcoming potential
roadblocks, and an indication of the strength of evidence supporting each recommendation.
The guides themselves are subjected to rigorous external peer review. Users can sort by
subject area, academic level, and intended audience to find the most recent, relevant, and
useful guides. http://ies.ed.gov/ncee/wwc/Product#/ContentTypeId:3
Program Inventory
The GPRA Modernization Act of 2010, P.L. 111-352, requires that the Office of
Management and Budget (OMB) establish a single website with a central inventory of all
federal programs, including the purpose of each program and its contribution to the mission
and goals of the Department. The initial Federal Program Inventory was published in May
2013. The Department described each program within 27 budgetary accounts, as well as
how the programs support the Department’s broader strategic goals and objectives.
Since that time, Congress passed the Digital Accountability and Transparency Act (DATA
Act) requiring new public reporting requirements, which impact the definition of program
used in this guidance. OMB is currently working with agencies to merge the implementation
of the DATA Act and the Federal Program Inventory requirements to the extent possible to
avoid duplicative efforts. While OMB and agencies determine the right implementation
strategy, the initial Federal Program Inventory remains available on performance.gov or at
http://www2.ed.gov/programs/inventory.pdf.
152 FY 2016 Agency Financial Report—U.S. Department of Education
APPENDICES
SELECTED DEPARTMENT W EB LINKS AND EDUCATION RESOURCES
Projections of Education Statistics to 2023
For the 50 states and the District of Columbia, the tables, figures, and text in this report
contain data on projections of public elementary and secondary enrollment and public high
school graduates to the year 2023. The report includes a methodology section that
describes the models and assumptions used to develop national and state-level projections.
http://nces.ed.gov/pubsearch/pubsinfo.asp?pubid=2015073
Resources for Adult and Career and Technical Education
The Department, through the Perkins Collaborative Resource Network, offers resources
and tools for the development and implementation of comprehensive career guidance
programs. This includes guides for students, parents, teachers, counselors, and
administrators across relevant topics, such as planning and exploring careers, selecting
institutions, finances, and guidance evaluation. This source is an example of
interdepartmental cooperation between the Department and the U.S. Department of Labor.
http://cte.ed.gov/nationalinitiatives/gandctools.cfm?&pass_dis=1
The Literacy Information and Communication System (LINCS) is a Department initiative
that seeks to expand evidence-based practice in the field of adult literacy. LINCS provides
high-quality, on-demand educational opportunities to practitioners of adult education in
order to help adult learners successfully transition to postsecondary education and
employment. LINCS is comprised of three components: 1) the LINCS Resource Collection
provides free online access to high-quality, evidence-based materials and self-access
courses to help practitioners and state and local staff improve programs, services,
instruction, and teacher quality; 2) LINCS Regional Professional Development Centers work
with states to offer practitioners training and professional development activities; and 3)
LINCS Community provides an online social learning space (a community of practice) for
networking, information sharing, and collaboration among adult education leadership,
professional developers, administrative staff, and practitioners across the country.
http://lincs.ed.gov/
FY 2016 Agency Financial Report—U.S. Department of Education 153
APPENDICES
Appendix B: Glossary of Acronyms and Abbreviations
ABCP Asset-Backed Commercial Paper
AFR Agency Financial Report
APG Agency Priority Goals
APR Annual Performance Report
CAT Core Assessment Team
CCMS Continuous Controls Monitoring System
CHAFL College Housing and Academic Facilities Loan Program
CPSS Contracts and Purchasing Support System
DATA Digital Accountability and Transparency Act of 2014
DCIA Debt Collection Improvement Act of 1996
DNP Do Not Pay
DOL U.S. Department of Labor
ECASLA Ensuring Continued Access to Student Loans Act of 2008
EDCAPS Education Central Automated Processing System
ERM Enterprise Risk Management
FAFSA Free Application for Federal Student Aid
FASAB Federal Accounting Standards Advisory Board
FCRA Federal Credit Reform Act of 1990
FECA Federal Employees’ Compensation Act
FERS Federal Employees Retirement System
FFB Federal Financing Bank
FFEL Federal Family Education Loan
FFMIA Federal Financial Management Improvement Act of 1996
FISMA Federal Information Security Modernization Act of 2014
FMFIA Federal Managers’ Financial Integrity Act of 1982
FMSS Financial Management Support System
FSA Federal Student Aid
154 FY 2016 Agency Financial Report—U.S. Department of Education
APPENDICES
GLOSSARY OF ACRONYMS AND ABBREVIATIONS
FY Fiscal Year
G5 Grants Management System
GAAP Generally Accepted Accounting Principles
GPRA Government Performance and Results Act of 1993
GSA General Services Administration
HBCUs Historically Black Colleges and Universities
HCERA Health Care and Education Reconciliation Act of 2010
HEA Higher Education Act of 1965
HEAL Health Education Assistance Loans
IDEA Individuals with Disabilities Education Act
IES Institute of Education Sciences
IHE Institutions of Higher Education
IPERA Improper Payments Elimination and Recovery Act of 2010
IPERIA Improper Payments Elimination and Recovery Improvement Act of 2012
IRS Internal Revenue Service
IRS DRT IRS Data Retrieval Tool
IT Information Technology
LEA Local Educational Agency
LINCS Literacy Information and Communication Systems
NFP Not-for-profit
OCFO Office of the Chief Financial Officer
OCIO Office of the Chief Information Officer
OCR Office for Civil Rights
OCTAE Office of Career, Technical, and Adult Education
OELA Office of English Language Acquisition
OESE Office of Elementary and Secondary Education
OIG Office of Inspector General
OII Office of Innovation and Improvement
FY 2016 Agency Financial Report—U.S. Department of Education 155
APPENDICES
GLOSSARY OF ACRONYMS AND ABBREVIATIONS
OMB Office of Management and Budget
OPE Office of Postsecondary Education
OPM Office of Personnel Management
OSERS Office of Special Education and Rehabilitative Services
PAYE Pay as You Earn
PEPS Postsecondary Education Participants System
PIV Personal Identity Verification
SAFRA Student Aid and Fiscal Responsibility Act (SAFRA Act)
SAT Senior Assessment Team
SBR Statement of Budgetary Resources
SEA State Educational Agency
SFA Student Financial Assistance
SOC Security Operations Center
SOS Schedule of Spending
TEACH Teacher Education Assistance for College and Higher Education Grant
TIVAS Title IV Additional Servicers
Treasury U.S. Department of Treasury
156 FY 2016 Agency Financial Report—U.S. Department of Education
ACKNOWLEDGMENTS
Acknowledgments
This Agency Financial Report (AFR) was Other Contributors:
produced with the energies and talents of our
employees and contract partners. Office of the Deputy Secretary
Within the Office of the Chief Financial Officer, Federal Student Aid
the office of Financial Management Operations
(FMO) is responsible for certifying, processing, Office of the Inspector General
reconciling, evaluating, and reporting all agency
financial transactions; preparing annual financial Budget Service
statements and related notes and schedules;
and coordinating the external audit of the
Office of Communications and
agency’s financial statements.
Outreach
Financial Improvement Operations (FIO)
provides leadership and direction in the areas of Office of Planning, Evaluation, and
internal control assessment, financial Policy Development
management training, post audit activities, and
indirect cost determination. Office of the Chief Information Officer
Contracts and Acquisitions Management (CAM) Partners:
is responsible for the solicitation, award,
administration, and closeout of all contracts and Office of Management and Budget
other acquisition instruments for the Department.
Department of Treasury
We offer our sincerest thanks and
acknowledgment to staff of all participating Government Accountability Office
principal offices. In particular, we recognize the
following organizations for their contribution: Association of Government
Accountants
The following companies were contracted to assist in the preparation of the
U.S. Department of Education FY 2016 Agency Financial Report:
For general layout and Web design: ICF Macro
For database design: Plexus Corporation
For accounting services: IBM Business Consulting Services
Quality Software Services, Inc.
FMR Consulting, Inc.
Cotton & Company, LLP
The FY 2016 Agency Financial Report
U.S. Department of Education
Office of the Chief Financial Officer
An electronic version is available on the World Wide Web at
http://www2.ed.gov/about/reports/annual/index.html
U.S. Department of Education, November 2016
FY 2016 Agency Financial Report—U.S. Department of Education 157
OUR MISSION IS TO PROMOTE STUDENT ACHIEVEMENT AND PREPARATION FOR
GLOBAL COMPETITIVENESS BY FOSTERING EDUCATIONAL EXCELLENCE AND
ENSURING EQUAL ACCESS.
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